Apparently, the supply curve for renewable resources is perfectly INelastic while that of non-renewable resources is perfectly elastic. That makes no sense to me because I would think the opposite would be more intuitive. The explanation in Schweser for this difference is because the amount of available non-renewable resources, or “known stock,” tends to increase over time as technology changes and more discoveries are made, in spite of the supply being finite at any single given point in time. Based on the “hotelling principle,” the passage goes on to say that equilibrium prices rise based on the risk-free rate (as countries invest more if the price increase in non-renewables is less than RFR and vice versa). Schweser goes on to say that renewable resources are fixed, so supply is “independent of price” and thereby perfectly inelastic. Sure, I can just memorise and move on. But that just seems @$$-backwards to me. I thought the whole *point* of renewable resources was that they were *not* fixed in ways that non-renewables are limiting. Any thoughts from the Forum? Does anyone have a better way to explain this?
yes, this concept does seem counter-intuitive. however, thinking about demand/suppy for oil may help clear things up. oil is probably a finite resource, few theories are out there about oil regenerating itself over thousands of yrs, but we can’t say for sure. oil producing nations will pump oil based on market/demand prices. they control the amount that enters the market so supply is perfectly elastic because demand for oil is for all intentions perfeclty ineleastic. there are very few substitues for oil, hybrid cars/plug-ins still not viable option to offset high oil prices. so although the supply oil may be limited suppliers dictate how much they pump based on prices. increased oil prices will also provide incentive for companies to expand exploration to find new sources. hope that helps
Also, thinking of land as the ‘renewable resource’ helps. It’s renewable because you can never use it up, but there is only a finite amount of it. Since the quantity will always be the same, the supply curve is perfectly inelastic. But agreed. I have an econ degree and I found this concept counter-intuitive. Mind you, I never did natural resource economics.
Also remember: For a non-renewable, the quantity will be based on the “Present Value of the Expected Future Price”, not the current price. I always found this distinction a bit r*t*rd*d. Every product is produced based on the EXPECTED price when the product is finished production… but I digress… It’s a major idea from the book.
Think of it from the supplier’s point of view. If you have x number of units that are non-renewable then you want to sell them when you can make the most money out of it. On the other case, for renewables you are already going to get new supply no matter what and your goal is to fix all your quantity (hence a straight line up indicating inelasticity)
I think of it the same as Sevago00. If you are selling water from a tap, and know that it will continue to pour out and never end, you will sell your entire production at whatever price you can get for it.
Supply is not related to price as it is in the. More supply of nonrenwable resources will not be supplied (q) as price increases §. With renewable resources, the only thing that can shift the price is a change in demand, what people are willing to pay for them. Demand fully controls the price of renewable, has no control of nonrenewable. Best way i can think of.