The current demand Dfor 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 toS2, causing the price of the resource to fall toP2 and the quantity consumed to rise to Q2 A drop in the interest rate shifts the supply curve to S3, leading to an increase in price toP3 and a decrease in consumption to Q3 The supply of an exhaustible resource such as oil is thus governed by its current price, its expected future price, and the interest rate An increase in the expected future price—or a reduction in the interest rate—reduces the supply of oil today, preserving more for future use If owners of oil expect lower prices in the future, or if the interest rate rises, they will supply more oil today and conserve less for future use This relationship is illustrated in Figure 13.8 "Future Generations and Exhaustible Natural Resources" The current demand D for these services is given by their marginal revenue product (MRP) Suppose S1 reflects the current marginal cost of extracting the resource, the prevailing interest rate, and expectations of future demand for the resource If the interest rate increases, owners 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 Resource Prices Over Time Attributed to Libby Rittenberg and Timothy Tregarthen Saylor URL: http://www.saylor.org/books/ Saylor.org 714