Schweser Q on elasticity quantity, whether, exactly, elastic, gold

tango_gs

Quick one from Exam 2 Morning.
Basically it just asks about the supply curve for gold and whether it’s renewable or not
A Renew Inelastic
B Renew Elastic
C Non Renew Inelastic
D Non Renew Elastic
Obv, it’s nonrenewable, but why is it elastic? I thought necessities like water and such were inelastic. The key says its perfectly elastic. What exactly does that mean also? Thanks. I looked it up and it said price stays same no matter the quantity

slackeranalyst

This is a fantastic question, I like to relate it to oil when trying to wrap my head around it. Basically there is a limited/fixed amount of gold in the world so it is classified as a nonrenewable resource. Therefore, your supply curve is going to be perfectly elastic at a price that is equal to the present value of its expected price NEXT PERIOD (aka, its perfectly elastic).
Its kinda retarded as in real life I doubt gold is actually perfectly elastic. But that’s what we are assuming based on economic principles. Basically its perfectly elastic because, and I quote, “if suppliers can’t get their required price, they’ll leave it in the ground (or adjust quantity supplied to 0). There’s nothing to drive them to sell for a lower price.”
So the final one line answer is “The quantity supplied is determined by demand curve at a price that is the present value of expected next period price”

wilslm

Oh and one more thing. The water example is explained differently because it is flowing (moving), and thus, suppliers will sell it for going price regardless. It’s all about hedging and cost benefit from the suppliers point of view.

noel

The basic idea is that suppliers can take out as much oil/gold from the ground as they want based on the price they will get to it  thus, supply is elastic. Water, on the other hand, can only be sustainably extracted at a specific rate  therefore whatever the price is, there’s only X amount of supply. Thus its inelastic.