Derived Demand, Timber Values, &
Rent
Chapters 3 and 10
Input Markets
 No direct demand for logs for
the most part…
http://www.hellocotton.com/
decorating-a-wall-with-slices-of-wood-logs-1251305
http://www.homedit.com/interesting-diy-outdoortable-of-wood-logs/
Derived Demand
 The demand for inputs by firms is similar to demand for
goods and services by consumers
 Difference is that demand for forest products is usually
derived from demand for other goods (housing,
newspapers, magazines, furniture)
 As such demand for lumber is based on the supply of
lumber, along with other inputs, used in making the
product
Illustrating Derived Demand
Supply homes
Price homes
Supply other inputs
Shaded area here indicates
a willingness to pay after
deducting the cost of all the
other inputs
Demand for housing
Quantity
homes
Price lumber
This is then the
demand curve for
that input-in this
case, lumber
Supply lumber
Demand for softwood
lumber
Quantity
lumber
Example of Final and Input Markets
From Yanshu Li and Daowei Zhang. 2006. Incidence of the 1996
U.S.–Canada Softwood Lumber Agreement among
Landowners, Loggers, and Lumber Manufacturers in the U.S.
South. Forest Science.
Timber Supply
s
 Short-run
SLR
 Long-run
(conventional
and very longterm)
D
The Extensive Margin
 Stands vary in terms
of their Timber Value
 Timber Supply is
drawn from the
Timber Inventory
Economically
recoverable inventory
Net
value
($/m3
)
 The Timber Inventory
is sensitive to values
and costs
Q
Total inventory
Timber Supply
P
Perfect Competition
Producer Surplus
MC
P*
P=MR
C
0
Q
Profits, economic rent, and producer
surplus
 What is the difference between zero or normal profits,
economic profits, and economic rent?
 In standard assumption of perfectly competitive markets, all
factors of production are freely available, and opportunity
cost is market price of using them (wages, rental for capital)
 Therefore there is no “profit” under standard assumptions of
perfect competition-there are zero or “normal” profits
 Under perfect competition (economic) profits are a sign of
disequilibrium
Economic Rent
Economic rent occurs when we modify
our assumption of perfect competition
In resource economics there are two
main ways in which it can appear
market imperfections (market power or
distortions)
Or from inherent differences in the
productivity/quality of a resource
Economic Rent (2)
Economic rent is the
difference between
the price paid for the
factor and its
opportunity cost (its
best alternative use)
 The rule of thumb is to
assign this “excess
profit” to the factor
that is scarce
 Characteristic of
resource economics
 Land for housing in
Vancouver
 Forests in BC
 Ore deposits

Economic rent is the return
to a scarce input factor
over and above the
opportunity cost of
bringing it into production.
Profits or Rent?
 Assume you have some more productive forest land
so you can grow 10% more timber than anyone else
 Does this mean that your costs are 10% lower?
 No, it is the quality of the land
 You could lease the land and enjoy the rents associated
with the higher payments because of the productivity
 Therefore, these excess profits are assigned to the
land and called scarcity rent or economic rent
Economic Rent
$
p
Qs
S
S Consumer Surplus
R Economic Rent
R
Qd
q
Q/t
P
Perfect Competition (?)
Producer Surplus
MC
P*
P=MR
C
0
Q
$/m3
Economic Rent
MC
R
MR
C
0
V
Volume Recovered
m3
Why is it important?
$/m3
Economic Rent
Two main reasons:
MC
P
MR
Second, from the perspective of
the Crown, this represents the
return to the public (a
distributional goal)
C
0
First, rent measures a payment
above and beyond that
required to keep the factor in
production we can collect that
rent without changing the
production decision (maintains
efficiency)
V
Volume Recovered
m3
Different Stumpage Methods
Have Different Outcomes
$/m3
Economic Rent
collected by the
government
MC
MR
P
Stumpage
C
Deadweight loss
Economic Rent retained
by the logger
0
V’
V
Two types:
Lump Sum: One
price to pay to
access all the
timber (could be
appraisal or
competitive bid)-in
theory could bid up
to the full amount
and harvest at the
optimal level, V
Fixed Charge: A
payment on a per
cubic metre basis
(e.g. $X per m3).
This can be
determined
administratively
(through formulas)
or you could bid it
as well.
Volume Recovered m3
Utilization Standards
 Why Do we Have
Utilization Standards?
Deadweight Loss as a measure
of inefficiency
S
P
Consumer
Surplus
p*
Producer
Surplus
D
q1
q*
q2
Q
The purpose of utilization standards
http://www.for.gov.bc.ca/
BCTS/bulletins/Cruise_base
d_TSL_QA_Oct_2_09.pdf
Stumpage
• Stumpage is a term used to describe
the price paid for standing timber.
Our focus here is on using it to denote
the price paid to the Crown.
Stumpage/Government Revenues in BC, 1981-2010, 000’s of
Canadian dollars
$2,000,000
$1,800,000
$1,600,000
$1,400,000
$1,200,000
$1,000,000
$800,000
$600,000
$400,000
$200,000
09/10
08/09
07/08
06/07
04/05
02/03
01/02
00/01
99/00
98/99
97/98h
96/97h
95/96h
94/95h
93/94
92/93
91/92f
90/91e
89/90
88/89
87/88
86/87
85/86
84/85
83/84d
82/83d
81/82
$0
Alternative Stumpage Systems
• Fixed Schedules
• Appraisals
• Competitive Auctions

Speaker next Tuesday will speak to this