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ies in the earth, a certain population of fish live in the sea, and a certain number of acres make up an area such as Yellowstone National Park or Manhattan. Natural resources often present problems of property rights in their allocation. A resource for which exclusive property rights have not been defined will be allocated as a common property resource.

Land is the quantity of natural resources. The quantity of land is fixed and it cannot be changed by individual decision making. All natural resources are called land and they fall into two categories: Non-Exhaustible and Exhaustible.

Non-Exhaustible natural resources are natural resources that can be used repeatedly. For example, land (in its everyday sense), rivers, lakes, rain, and sunshine.

Exhaustible natural resources are natural resources that can be used only once and that cannot be replaced once they have been used. For example, coal, natural gas, and oil. These are also called hydrocarbon fuels.

The demand for natural resources as input into production is based on the same principle of marginal revenue product as the demand for labour and demand for capital. Owners of exhaustible natural resources can be expected to take the interests of future as well as current consumers into account in their extraction decisions. The greater the expected future demand for an exhaustible natural resource, the greater will be the quantity preserved for future use.

Current of resource (Exhaustible Natural Resources)

The current demand D for services of an exhaustible resource is given by the marginal revenue product (MRP). S1 reflects the current marginal cost of extracting the resource, the prevailing interest rate, and expectations of future demand for the resource. The level of current consumption is thus at Q1. If the interest rate rises, the supply curve shifts to S2, causing the price of the resource to fall to P2 and the quantity consumed to rise to Q2. A drop in the interest rate shifts the supply curve to S3, leading to an increasing in price to P3 and a decrease in consumption to Q3.

The current demand D for these services is given by their marginal revenue product (MRP). If the interest rate, owner will be willing to supply more of the natural resource at each price, thereby shifting the supply curve to the right to S2. The current price of the resource will fall. If the interest rate falls, the supply curve for the resource will shift to the left to S3 as more owners of the resource decide to leave more of the resource in the earth. As a result, the current price rises.

The supply of land is a vertical line. The quantity of land in a particular location is fixed. Suppose, for example, that the price of a one-acre parcel of land is zero. At a price of zero, there is still one acre of land; quantity is unaffected by price, if the price were to rise, there would still be only one acre in the parcel. That means that the price of the parcel exceeds the minimum price –zero- at which the land would be available. The amount by which any price exceeds the minimum price necessary to make a resource available is called economic rent.

Question No. 2

What is demand? Explain the relationship between demand and price. Discuss the other factors that can determine demand. Provide examples.

Answer of Question No. 2

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