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November 17, 2019 

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AD: The abbreviation for aggregate demand, which is the total (or aggregate) real expenditures on final goods and services produced in the domestic economy that buyers would willing and able to make at different price levels, during a given time period (usually a year). Aggregate demand (AD) is one half of the aggregate market analysis; the other half is aggregate supply. Aggregate demand, relates the economy's price level, measured by the GDP price deflator, and aggregate expenditures on domestic production, measured by real gross domestic product. The aggregate expenditures are consumption, investment, government purchases, and net exports made by the four macroeconomic sectors (household, business, government, and foreign).

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FREE RESOURCE:

A resource that can be used to produce consumer-satisfying goods and services without imposing an opportunity cost on society by preventing the production or consumption of other consumer-satisfying goods or services. Production using free resources often results in free goods.
A resource is free if it can be used to produced all of the goods that people want or need it to produce... and then some. In other words, the use of the resource to produce one good does not prevent the production of other goods. There is more than enough of the resource to do everything that everyone wants it to do.

Free, Not Unlimited

Being free, however, does not mean that a resource is unlimited. Free resources are inevitably limited resources. Resources are free because the available quantity exceeds the desired use. This situation can exist for a couple of interrelated reasons.
  • One, society has little use for the resource. Many scarce resources in today's modern economy were once free. They were free because society had very little use for the resources. Petroleum is an example. Before the development of the internal combustion engine, society had limited use for petroleum. There was more than enough to satisfy those uses.

  • Two, the resource is useful, but extremely abundant. A few resources are quite useful and even essential to the modern economy, but free because the available quantity far exceeds the desired use. Air offers the best example. Although air is extremely useful (human life could not exist without it), abundance makes it a free resource in most circumstances (exceptions being an airtight bank vault, an orbiting spacecraft, or a sunken submarine).
In both cases the resource is limited and provides some use to society. It is free only because it is abundant relative to the desired use.

No Market, Zero Price

Being free has one important, practical interpretation. The market price of the resource is zero. In fact, free resources are not traded through markets. Market trades are not possible. If a resource is sufficiently abundant to satisfy all existing wants and needs, then no one can sell it, no one can charge a price to transfer ownership. The bottom line: A free resource is quite literally free.

Moreover, efficiency is served if the price of a free resource is zero. Efficiency is achieved by the equality between price and cost. Because a free resource is abundantly available, the use by one does not impose an opportunity cost on other users. With zero opportunity cost, a zero price achieves efficiency.

However, while a resource might be free today, should conditions change, it might not be free tomorrow. A resource is free as long as the available quantity exceeds its desired use. Should its availability become limited or its use expanded, then a free resource becomes a scarce resource. Again, while air is a free good most of the time across most of this planet, if pollution reduces availability or population growth increases the need, free air would cease to be.

A Word About Surpluses

At first glance, a free resource would seem to be equivalent to a market surplus, that the two are one and the same thing. A closer look, though, reveals otherwise. A surplus depends on the existing market price. If the market price is above the equilibrium price, then the quantity supplied exceeds the quantity demanded AT THE MARKET PRICE, and a surplus results. However, at a different price, the surplus vanishes. In contrast, a free resource exists if the available quantity exceeds the desired use at a ZERO price. Because there is no market for a free resource, the notion of market surplus really has no relevance.

In contrast, a scarce resource exists if the desired use exceeds available quantity at a zero price. However, because a scarce good is generally traded through a market, it can experience either a shortage or surplus depending on the market price relative to the equilibrium price.

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Recommended Citation:

FREE RESOURCE, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2019. [Accessed: November 17, 2019].


Check Out These Related Terms...

     | free good | free lunch | scarce resource | scarce good |


Or For A Little Background...

     | scarcity | limited resources | unlimited wants and needs | efficiency | opportunity cost | value |


And For Further Study...

     | first rule of scarcity | factors of production | government functions | three questions of allocation | distribution standards | ownership and control | production possibilities |


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