"There is a fixed amount of gold ore in the world so it is treated as a non-renewable natural resource. As such, its supply curve is horizontal (perfectly elastic) at a price equal to the present value of its expected price next period. " Can someone further explain to me why the supply curve of gold is perfectly elastic?
Doesn’t matter what the price is, people still want it, perfectly elastic. Think about what oil is doing right now.
amberpower, that would be the demand for gold. I think for supply the reason it is perfectly elastsic is the extracted amount (versus reserves) can be sold at any quantity required if the price goes up.
Doh! Thanks.
Its perfectly elastic because 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. Alternatively is the water example that is inelastic. Its flowing no matter what so the quantity is fixed and they will sell at whatever price it intersects with the demand curve.
good point SirViper, but how do you see it when price goes up?
Adding to SirViper’s explanation, the suppliers of gold have their thoughts about future demand for gold and potential future prices of gold (likely built off of futures prices to ensure no arbitrage opportunity). As such, they are not willing to sell today for less than the PV of future gold prices. Therefore they will supply at a fixed price, and the supply curve is horizontal (perfectly elastic) at this price. Dreary, the future increase in prices should be factored into your PV.
Price won’t go up for gold unless the perfectly elastic supply curve shifts up for a different reason (ie. extraction becomes more expensive) and the supplier requires a higher price. Whereas the price for water can change when the demand curve changes because the supplier needs to sell it for whatever price the market will pay. There’s no point for them to be stingy and not sell it as its a renewable resource. So anything is better than nothing.
think of the market of $1 bill nobody is going to sell below $1 any price above $1 will attract competitor, then the price goes down
Sudden political turmoil, fear of the future, etc., can hit people any time. If supply was perfectly elastic then price won’t go up, but that’s not true, price does go up …we see it every day! Another explanation?
Hah… yea but half of this econ stuff doesn’t foot with real life. Gold is probably not perfectly elastic in real life. While theoretically gold producers should keep it in the ground until they can get the price required (pv of future expected prices), they do need to eat. So if demand for gold dries up, they’ll probably still want to sell some at a lower price vs hoping that demand eventually catches up with their required price (which btw is based on unknown future expected prices). Also its good to remember that the supply curve of gold is set by the gold producers. If they think gold has now become more valuable, their supply curve can shift up. Moving the price up and quantity down.
good answers, but if I had the time I would look up where they distinguish between short run and long run supply curves for gold…I think that’s where the correct explanation is.