27 - Capital and Natural Resource Markets

Abstract

This chapter focuses on capital and natural resource markets. Firms regulate their use of inputs depending upon the marginal costs of those productive resources and their marginal revenues. The profit-maximizing firm uses any given resource until its marginal revenue equals marginal cost. Changes in either marginal costs or marginal revenues alter the firm's demand for inputs. The demand for capital is more complicated because capital should be purchased at present but revenues are earned in the future. Firms should use the tool of present value to compare these costs and revenues. The firm purchases capital to the point where its current marginal cost just equals the present value of its future marginal revenues. Most inputs are supplied along the lines of the producer decision. Natural resources supplies, however, can be affected by other economic events. In the case of a finite natural resource, opportunity costs should be considered. This makes the production decision different from that for a good without a finite production limit.