supply elasticity of a non-renewable resource should be perfecly inelastic, not perfectly elastic

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SadCFAWannabe

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According to the CFAInstitute and Schweser, the supply elasticity of a non-renewable resource supposedly is perfectly elastic (horizontal). To my tiny mind, this defies all logic. Shouldn’t the supply elasticity be inelastic (vertical) like the supply curve for oil?
See this link:
http://www.iammea.org/awissner/peakoil/supplydemand.gif
The Sad One
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this keeps reappearing, hard to digest.
i think of land. perf inealstic supply. i think of water. water cab be renewed. so water = pef elastic supply
memorize these 2, boom,
 
daj224 Wrote:
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> this keeps reappearing, hard to digest.
>
> i think of land. perf inealstic supply. i think of
> water. water cab be renewed. so water = pef
> elastic supply
>
> memorize these 2, boom,
actually, am i right here?
i know land is fixed in supply, so that is inelastic…water and oil confuse me
 
renewable- perf. inelastic- economic rent
nonrenewable - perf elastic. - opportunity cost
 
Gold.. oil…
supply is elastic because producers control the rate at which it is extracted..
… water.. which flows.. like a waterfall or a spring.. you can’t stop that sucker… it’s supply is not changing no matter what you do so it’s inelastic
Don’t overthink the ‘oh my god, supply will run out.. .so the supply is fixed.. it must be inelastic”… you have to think over the long term.. in any given year.. it’s very much controllable and elastic.
 
beingthatguy Wrote:
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> renewable- perf. inelastic- economic rent
>
> nonrenewable - perf elastic. - opportunity cost
lebron james marginal revenue product is high.he is all ecoonmic rent
 
Yes. Water is renewable as far as I’m aware. So perfectly inelastic. Total economic rent.
 
So can one of you bright guys please explain to my midget mind why the price of oil is rising if its supposedly has a perfectly horizontal supply curve and the demand curve is shifting out and to the right due to China and India?
And what does economic rent, (defined as revenue in excess of opportunity cost) have to do with supply elasticity, defined as percentage change in quantity supplied over percentage change in price?)
Very Sad One
 
look to the Wii….
WI= water is inelastic…water is of course renewable… economic rent = movie stars= inelastic
opportunity cost- non renewable by default
 
Skip,
If water is renewable, then if price increases, you just roll out more of that almost endless supply. Thus, percentage change in quantity produced increases with percentage change in price, implying an upwardly sloping supply curve. Sure, economic rent will go up too, because the cost of water is fixed and supply abundant, and you get paid more per unit if price goes up.
If oil is non-renewable, then supply won’t increase if demand does, so prices go up, quantity stays the same. Thus, vertical demand curve. The opportunity cost of oil actually increases because it is scarce, so economic rent may or may not increase depending on how much the opp. cost of oil increases.
sad and Confounded one.
 
Non renewables are a fixed asset that must be managed for the maximum benefit of the owner/producer.
The way they amange that asset is to increase supply during times in which they expect that the next period price will be less than current price *(1+rfr).
A renewables owner/producer doesnt have to make that decision, they only focus on sustainable usage.
So essentially, the non renewable can react to demand better than the renewable
 
Th,
According to your reasoning, you seem to be saying that supply of a non-renewable resource isn’t fixed, since it can be managed, right? Sounds a bit contradictory to me.
SadCFAWannabe who wants to be Happy
 
I give up. I guess I’m just gonna have to regurgitate the nonsense the CFA Institute is perpetuating to pass this Godforsaken exam.
ResignedCFAWannabe
 
The known stock is fixed, apparently, but it tends to grow over time as technology enables its extraction- for instance the oil fields of the coast of brazil would cost over 240 b to make it viable with todays technology
I’ll admit it doesnt seem to make sense, but put yourself in the position of the “fixed” supply owner, once you sell it you dont have anything so in any period you would use your judgement on how much to sell- and you’ll develop that opinion through demand expectations
For the guy selling something that refills every time it rains, he has the incetive to sell all of it everytime.
The ultimate effect is that you hold back on pumping out your oil unless the next period price does not provide sufficient returns, where as the water man keeps pumping
 
yes… you can divulge yourself behind the theory as much as you like. but you cannot apply your view of common sense to a scantron test that is being graded on a curve. memorize what they tell you to and unfortunately…learn it the way they want it to.
DANCE PUPPETS!!! DANCE!!
 
this is intuitive, internalize it
for oil, supply depends only on demand
for water, supply is what it is
if i dont sell it, there will be more of it in the next period
 
th123,
good idea. i guess the way to state is that short term supply isn’t fixed for non-renwables isn’t fixed , but long term, it is.
for renewables, both short term and long term aren’t fixed.
A Little bit happier SadOne
 
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