Skjellifetti

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  • Commodity Conundrum Solved: The Hidden Parameter in Interest Rates
    This just looks like a restatement of the classical economic theory used to explain finite resource extraction rates. If you are the owner of a finite amount of a resource sitting in the ground, at what rate should you mine the resource in order to maximize your long-run discounted profits? If you sell a marginal unit today, you can put the proceeds in a bank and earn an interest rate r. If you hold the unit in the ground, and sell it tomorrow, you have lost r unless the price of the unit increases by the same amount. All that the author is saying is that interest rates have a powerful effect on the owner's decision to sell the marginal unit today or tomorrow. Polaris and Georealist are quite correct in that the demand curve is the other half of the equation and is necessary for understanding why tomorrow's price may not be the same as today's. Shalom is correct, too, in that extraction costs change through time as does demand since higher prices are a powerful incentive for developing substitutes for any product.
    May 01 16:17 pm |Rating: 0 0 |Link to Comment |View article

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