Transcript Lecture 2 - Illinois State University

 Homework
 Quiz
#6 Due Oct. 21
#3 Oct. 23
 Extra Credit Writing
16th by 5pm.
 Writing
Assignment due Oct.
Assignment Due Oct. 23rd
 Let
demand
• P=8-0.4Q
 Let
extraction cost
• MC=$2
 Let
supply be fixed at 40 units
 The
Population Bomb
http://en.wikipedia.org/wiki/The_Popula
tion_Bomb
• Written in 1968, predicting a population crash
due to resource scarcity
• The Simon -Ehrlichwager :
http://en.wikipedia.org/wiki/Simon%E2%80%9
3Ehrlich_wager
 Physical
supply - available reserves
measured in physical terms without
regard for cost and value
 Economics
supply – the amount of a
resource that is available based on
current prices and technology
 Subeconomic
resources – resources
whose costs of extraction are too high to
make production worthwhile
 Economic
reserves – resources of high
enough quality to be profitably produced
and are identified

Identified reserves – the identified quantity of a resources;
includes both economic and subeconomic reserves

Measured reserves – resources that have been identified
and whose quantity is known with certainty

Indicated or inferred – resources that have been identified
but whose exact quantity is not known with certainty

Undiscovered Reserves
• Hypothetical – the quantity of a resource not identified with certainty
but hypothesized to exist
• Speculative – the location and quantity of a resource has not been
identified but is hypothesized to exist
 R=P-MC
 PV
[R] = R0 + R1/(1+r) + R2/(1+r)2 +…
 Optimal
extraction quantity
 R0 = R1/(1+r) = R2/(1+r)2 =…
 Hotelling’s
Rule - net price rises over
time with the rate of interest.
 Choke
price – the minimum price of a
good or service that would result in a
zero quantity demanded
 Price
path – the price of a resource over
time
 Extraction
path – the extraction rate of a
resource over time
 Changes
to reserves
• The resources are extracted and used =>
diminished reserves
• New resource deposits are discovered =>
increasing reserves
• Changing price and technology can make more
or less of the known reserves economically
viable
 The
transition for two non-renewable with
different marginal costs will be a smooth
one.
 The rate of increase of total marginal cost
slows down after the time of transition
because the marginal user cost
represents a smaller portion of total
marginal cost for the second, higher cost
resource.
19
Pressures on transportation routes
Reconfiguration of gas corridors
TransCanada
GTN
Bison
LNG
Ruby
LNG
REX
Kern River
Expansion
Fayetteville Express
Gulf Crossing
Midcon Express
LNG
FGT Expansion
Flow increase
Flow decrease
20
U.S. Coal Generation Supply Curve 2011
Source: Derived from SNL data
21
 Homework
 Quiz
#6 Due Oct. 21
#3 Oct. 23
 Extra Credit Writing
16th by 5pm.
 Writing
Assignment due Oct.
Assignment Due Oct. 23rd