Is the supply of gold perfectly elastic?

CFA Level I
#1

Q from Schweser: Is a gold mine an example of a renewable or non-renewable resource and is the supply curve of gold perfectly elastic or inelastic in theory? Answer: Non-renewable, Elastic. When this question says “the supply of gold” is it referring only to the gold that this mine produces? And is it assuming that all gold in the mine is equally difficult (or costly) to extract? Why is the supply of gold perfectly elastic?

#2

when i think of non-renewable and perfectly elastic supply curve oil comes to mind. similar to oil, when prices rises, consumers can cut back consumption, but will still be consuming at some level. suppliers can counteract this effect by curtailing output so consumption decline will be mitigated.

#3

I’m not sure I see how that makes supply perfectly elastic. Is the question talking about the firm’s supply curve, or the whole industry? Either way, shouldn’t the supply curve for either be MC > AVC. If we’re talking about the firm, doesn’t this question imply that we’ve made the assumption all gold is equally costly to extract (from this mine), but is infinite in quantity? That the firm will supply an unlimited quantity above the marginal cost of extraction, and that marginal cost doesn’t suffer from diminishing returns?

#4

I guess what I’m getting at is hasn’t gold been used as a currency because its supply is relatively price inelastic?

#5

NByz, im confused as well, i would have thought gold, being a non-renewable resource, would be supply inelastic as if demand increased the price would increase rather than supply (hence the flutuations in the gold price). This is due to their being a finite supply, and also an increase in production being difficult and costly. What LOS is this from?

#6

It’s from… the morning session of Practice Exam 2 in the 2008 Schweser notes. Question 42.

#7

A little search yielded the following thread. It has some discussion on the topic. It still doesn’t do it for me. In the “compete down to marginal cost” and “only profit is the opportunity cost of capital” world of perfect competition that economists live in, wouldn’t gold continue to be extracted as long as its market price was > MC? http://www.analystforum.com/phorums/read.php?11,731979,732126#msg-732126

#8

I dont have my books with me. i cant find anything suporting the fact that it is elastic on the net, but i can find a few supporting that it is inelastic. Yep, making me even more cofused…

#9

I dont have my books with me. i cant find anything suporting the fact that it is elastic on the net, but i can find a few supporting that it is inelastic. Yep, making me even more confused…

#10

I think this explains it. Good to know that we arent the only ones scratching our heads over this. We need to be looking at the present value of the future price, TheAliMan datils it 5 from the bottom. http://www.analystforum.com/phorums/read.php?11,856217,856255