March 7, 2014

EVEconomics 101: Supply and Demand

Okay, so now that you're aware of where ISK comes from and where it goes, let's talk about what it does while it sticks around. There are a myriad terms, theories, models and systems to understand how money works, but one model is especially simple to understand and easy to apply: supply and demand. You have probably heard it before, and even run into a terse summary of it. Perhaps it went like this:

The more of something is available, the lower its price, and vice versa.
The more of something people want, the higher its price, and vice versa.

While that is technically true, the supply/demand model goes much deeper. To really "get it" though, you need to start from square one. So... let's examine the market for my favorite ship, the Rifter!

Not this one, unfortunately. It never made it to the market. :(

Who's in the market for Rifters?


Rifters are a limited resource. Sure, they can be easily manufactured, but nobody has a literally unlimited supply of Rifters. In the same way, there is a limited amount of people who want Rifters. Because of this, they have value! Those who can supply Rifters for sale are called producers, while those who would buy the Rifters are called consumers. A very important fact is that these two groups are dynamic, and may change at any time.

Producers are in it to make money. If the Rifter is viewed as a crappy ship and nobody wants it, you can bet there will be very few producers in the market. On the other hand, if the Rifter is popular, there will be tons of producers. The number of producers is largely irrelevant, though. What really matters is the answer to the question: "How many Rifters are producers as a whole willing to sell at a certain price point?" The answer to that question is called supply.

A producer desperate for materials to make more Rifters

Consumers, on the other hand, are in it because they want to use Rifters to do stuff. What that stuff is is irrelevant; all that matters is that the consumers have cash and potentially might buy a Rifter. How many actually will spend the money depends on the perception of "worth it". I know the most staunch Rifter-haters would buy huge piles of Rifters if they were only 1 ISK each, and even diehard Rifter pilots would stop buying Rifters if the price jumped too high. Whether the motive is price or usefulness, consumers are summarized with one question: "How many Rifters would consumers buy at a certain price point?" As you probably expected, the answer is called demand.

Do you see how vague and theoretical the questions defining supply and demand are? That's on purpose. Supply and demand are hard to assign numbers to, so for simplicity's sake basic analysis only looks at relative vague values, usually represented on sketched-out graphs without scales.

Supply

Lovingly mouse-drawn for your viewing pleasure

This is about as complicated as the graphs get. Notice the lack of numbers. Remember the question defining supply?
"How many Rifters are producers as a whole willing to sell at a certain price point?"
All this graph is saying is that as the price of Rifters goes up (follow the vertical axis up), so does the quantity available (the red line is farther to the right). If the price gets high enough, the amount of people who would want to make/sell Rifters would go through the roof.

What if the Rifter's blueprint gets tweaked to require more tritanium? Suddenly, fewer people will be willing to make/sell Rifters at the same price. Since the supply graph can only accommodate changes in price, not changes in the market, we need a new graph (old one kept as a dotted line):

That's a nerf. Had production been made easier in some way (such as adding more manufacturing slots to hisec stations), the line would instead move to the right. That would be a buff to production.

And now... a word from my sponsor.

Intermission

All that economics sure is thirsty work, isn't it? Quench your thirst with some refreshing Quafe Zero! Even the Rifter loves it!

The Mountain Dew represents how rich you will be if you drink Quafe Zero.

Demand

Now that that's over with, let's look at the other side of the market: the consumers. The question that we asked in order to define demand was:
"How many Rifters would consumers buy at a certain price point?"
The cheaper Rifters are, the more people would be willing to buy them. The reverse also applies. This is essentially the opposite of the supply curve, and results in a graph looking like this:

As you can see, the lower you move on the vertical axis, the higher the quantity of Rifters people will be able to buy. This is why, if you put 1000 Rifters up on the market for 1 ISK each, they will be gone within minutes.

What happens if the Rifter gets buffed, though? Naturally, its newfound power inspires people to be okay with paying somewhat more for their favorite frigate. The increase of demand in Rifters due to a buff is represented by a change in the graph similar to what you saw in the demand curve:

The graph moved to the right to show the increased demanded quantity because of the buff. A nerf would have caused movement in the other direction.

Putting it together


You are probably wondering what the point of these simplistic graphs is. To blindly layer them on top of each other, of course! No scale? No problem!


The most important part of this graph is that intersection point called the equilibrium. That is where the market will converge; the price and volume of a stable Rifter market is right. If a supplier tries to sell for a price higher than that (the upper dotted line), he will encounter lower demand than his competitors at lower prices, and won't sell as many Rifters. Conversely, selling at a lower-than-equilibrium point (the lower dotted line) will result in very quick sales due to high demand, but will lose the supplier potential money. 

How is this overcomplicated mess at all useful? 

It lets you speculate about a variety of fun stuff! For example, what will probably happen due to the Rifter buff? Remember the demand shift earlier? Let's put it on the compound graph.

There will be more Rifters sold at higher prices!

But maybe that's not impressive enough, because the original intuitive definition of supply/demand predicts the same thing. Let's look at some another situation that the supply/demand model simulates well.

Scarcity

Ever gone to null security space and tried to buy a Rifter on the market? Remember the sticker shock? Here's what's happening: the extremely poor T1 nullsec industry is causing an artificial cap on the maximum quantity of Rifters anyone is able to put on the market. That makes an entire area of the graph inaccessible.

Because the quantity of Rifters sold can't go over a certain threshold, there is little point for the producers to sell the Rifters at competitive, reasonable prices. From the consumer's viewpoint, that results in a market only open for those who are willing to pay a ton. That's not equilibrium, it's highway robbery!

What else?

This rabbit hole goes down much further, as supply/demand can be used to simulate resource cartels, market price manipulation, and can even be applied with money itself as the commodity at hand. Basically, it can be applied to almost everything you encounter here:



However, this blog post has gone on long enough. Tune in next time for talk of elasticity, and clues on how to abuse the market for fun and profit! Don't forget to buy your Rifters and Quafe!

Disclaimer for economist bittervets: the examples used were picked on a "simplicity", not "ultimate economic accuracy" basis. You are welcome to present better examples if you see fit.

EVEconomics 101: ISK Sinks and Faucets

Wait, what? This has nothing to do with frigate pew pew! 


Well no, it doesn't, but it's important. Being aware of how money works is a very large part of being successful in New Eden, and for that you have to understand where ISK comes from, what ISK does, and where ISK goes.

Not only does knowing about ISK flow enable you to understand some of why the universe works the way it does, but it also enables you to win arguments and look smart! Handy!

First things first, what is money?


Imagine that, instead of your wallet you have a big bucket, and instead of being solid (or virtual), money is simply Mountain Dew*. Every pilot is just walking around with these big buckets with varying degrees of Mountain Dew in them. This Dew does not inherently have any value to anyone, because it's toxic to drink and has no other useful purpose. It just so happens that by social convention, people have agreed to use it as a representative of value.


Owning lots of this Dew is very useful, because when you want someone to give you something, they almost always ask you to pour some of the Dew from your bucket into their bucket. This pouring is perfect, and not a single drop is ever lost. The total amount of Dew that people have stays the same; it's just who has more Dew that changes. This is called "the economy".

Do you see how simple this is? There is no way to get more Dew except from another person, and there's no way to lose Dew except giving it to another person.

This is boring, though. Why can't you just make or get more Dew? Well... it turns out you can.

ISK faucets


It comes out of nowhere!
What is one of the first things you do in New Eden? Ratting! You find an asteroid belt, heat up your guns, and squash a rat. This pleases the local CONCORD officer. She walks up to you, dragging a big hose labeled "☠ DEW ☠". Smiling, she squirts a bit of it into your bucket.

That's an ISK faucet! Whenever the total Dew flowing around the economy (the total amount in all buckets) increases, the source or mechanic by which this new Dew is introduced is called a "faucet". 

So you continue merrily stomping on rats, with the CONCORD agent in tow, periodically dumping globs of Dew into your bucket. But then... you run into a rat you cannot defeat, and you get blown up! That's totally going to cost you Dew! Darn! The agent looks at you with pity in her eyes... and squirts some more Dew into your bucket. What gives? Insurance!

That's right, insurance is another ISK faucet! There are tons of other non-capsuleers standing about with big Dew hoses, just waiting to reward you for doing something for them.

But then... there are also some standing next to some ominous looking grates. Who are they?

ISK sinks


Glistening sticky caked Dew coats it.
One particularly sleazy-looking character wearing a State War Academy emblem notices you lost your ship and saunters up to you, offering to sell you a blueprint to build as many more ships of that kind as you like. You take him up on the offer, but as you habitually get ready to pour some Dew into his bucket, you notice he has none. He notices your confusion, and explains "Just pour it down... you know... my grate," then gives you a slow wink.

You've found an ISK sink! Buying blueprint originals (BPOs) from the market in an academy station does not put your Dew in another pilot's bucket. You're just dumping it down the drain!

The next day, you have a new ship and are just finishing up a mission for an agent of the Caldari Navy. She walks up and pours some fresh moist Dew goop into your bucket, but then also hands you what look like movie tickets branded with the Navy's emblem. She explains: "We call these 'Loyalty Points'. You can use them with our rewards program down the street to get some shiny loot." Everyone loves scrip, right?

So you head over and after some deliberation you decide to buy an implant with your scrip. The clerk shakes his head and points to a grate in the corner of the room. "You gotta grease the wheels to use your LP, rookie."

Yup, cashing in your LP is another ISK sink! With some missions this is offset by the hose-Dew, but certain things, like Factional Warfare complexes, only pay in LP, so they are pretty clearly ISK sinks. If you give Dew to anyone without a bucket, you're just pouring it down the drain, and that's an ISK sink.

And so it flows...


That's pretty much it on how Mountain Dew (in the real world, ISK) enters and leaves the economy of peoples' buckets. Nobody knows where the grates go or where the hoses are coming from, but if they're connected it might have something to do with the Dew being so toxic. 

Misconceptions (or: GRR, GOONS!)


Grr, those goons and their ISK faucet moon mining. Grr.
There are some common misconceptions on what is and is not an ISK faucet/sink. Here's a sampling of them:

  • Moon mining is not an ISK faucet! Neither is it an ISK sink! Those who do moon mining are simply picking up shiny stuff off the ground, and give that shiny stuff to other pilots, who in exchange pour some sugary Dew over. No hoses or grates are involved.
  • Losing ships to combat is not an ISK sink! It's just your ship that explodes. The Dew in your bucket doesn't go anywhere. In fact, you get a bunch more from insurance, so losing ships is actually an ISK faucet.
  • Trading in PLEX is neither an ISK sink nor an ISK faucet! The only thing that spontaneously appears out of a "faucet" is the PLEX itself. The only Dew loss in the economy is the market tax (which does go down the drain).
  • Most/all extremely good sources of income are not ISK faucets! They just are not. The "ISK faucet" term is completely mis-applied in this case to mean "profitable", when it means something completely different. Many of these sources of income are in fact ISK sinks.
So there you go! You are now perfectly equipped to be a mildly educated armchair economist on the Eve Forums, and perfectly qualified to recognize when someone has no idea what they're talking about because they mislabel an ISK sink or faucet.

* I was going to use Quafe as the example liquid, but Quafe Company threatened legal action so I had to switch to a fictional product.