How the Economy Works

[Nep-Neps]

To everyone who hasn’t taken a macroeconomics course before:

When there’s more money being printed but no more goods being produced in an economy, the CPI increases and as a result you need to pay more for that good. For example, today the going price of an cookie is $3 and there’s only $300 to go around. That means that cookie is worth 1/100th of the entire market. Now lets say the government decides it’s too poor and prints out $300 and spends it. That means the economy has $600 and in order for the cookie to still be 1/100th of the entire market, the price would need to rise to $6.

There’s also the supply and demand of the cookie, but for our purposes we will assume that supply remains constant, and demand rises. Lets say we have a $3 cookie with only $300 to go around for everybody. If there’s only 10 cookies and 10 people in the society, then everyone gets their cookie and everyone’s happy. If there’s 20 people in the society however, then there’s not enough cookies for everyone. In this case, people will outbid each other in order to buy that cookie which drives the prices up.

Finally, let’s assume cookies are a necessity to live. This both drives demand up and at some point the cookie sellers will think “Hey, if I increase the prices of my cookie people will still have to buy it because they need it”. They can increase the price to whatever they want, as long as people can afford it, which further drives prices up.

Now given these three examples, prices of limited commodities work just like cookies. Let’s take PLEX for example. Lots of isk is being injected into the economy through b̶o̶t̶s̶ krabs, the playerbase expanded greatly with the introduction of alphas and now many people require plex to keep their L4 missions and rorq/supers running. This increases the CPI of eve’s economy, and as a result we pay more for PLEX.

Of course, all of these are based on the assumption that the supply of PLEX isn’t decreasing, and by supply I mean the amount of PLEX bought daily. As well, market manipulation and artificial inflation were excluded from this because while I personally believe the current PLEX market is artificially inflated slightly I don’t really feel like explaining what it is and what it means. Go take your own macro/micro course

[Tipa_Riot]

TL;DR prices follow supply and demand?

Thanks for the lesson.

[Nep-Neps]

Seems pretty simple, but it appears there’s a lot of high school students who haven’t taken economics in eve

[Do_Little]

A lot of players feel entitled to play the Omega game free of charge without considering how CCP pays their staff, let alone makes a profit, if everyone plays for free. They can ease pressure on the supply side with a PLEX sale or on the demand side with a subscription sale. It’s a while since we’ve seen either.

[Nicolai_Serkanner]

@Nep-Neps

based on the assumption

And … we have another useless topic.

[Greyspear]

@Nicolai_Serkanner

And … we have another useless topic.

Speaking of “How the economy works” … It is not the economy that works, but it is the people within it who do. Ba dum tss

[Teckos_Pech]

@Nep-Neps

If there’s only 10 cookies and 10 people in the society, then everyone gets their cookie and everyone’s happy.

No.

The number of cookies people have depends on the preferences of the 10 people regarding cookies and other goods in the economy. Also, the cost is important too, but you’ve already ruled out changes in cost ex ante by assuming a perfectly elastic supply function. Hint: supply is the horizontal sum of the various marginal cost curves.

So, it is possible that not everyone has a cookie…because those people value cookies such that they want no cookie and instead want other goods and services. This assumption that everyone has a cookie is very restrictive.

Now, if you want to start out in an economy where everyone starts out with an endowment of one cookie and then engage in trade that’s fine. But that is not what you are doing. Oh, and if you are going to do this…have at least two goods so there is the notion of a trade off. To get another cookie what must I give up in return…

@Nep-Neps

Finally, let’s assume cookies are a necessity to live. This both drives demand up and at some point the cookie sellers will think “Hey, if I increase the prices of my cookie people will still have to buy it because they need it”. They can increase the price to whatever they want, as long as people can afford it, which further drives prices up.

Again…no. If we argue that cookies are a necessity that is say everyone needs at least one cookie that has implications for the slope of the demand curve, at least in a particular region, it does not “drive up demand”.

@Nep-Neps

Now given these three examples, prices of limited commodities work just like cookies. Let’s take PLEX for example.

Now your framework of a cookie vs. PLEX doesn’t work. It doesn’t work because there is a very good substitute for PLEX that is actually quite a bit cheaper: a subscription. Now a player who has accumulated a massive amount of wealth, say a trillion ISK or more might decide to PLEX his account, but players who are trying to PLEX their account without such vast wealth are failing to appreciate the opportunity cost of time.

@Nep-Neps

Now given these three examples, prices of limited commodities work just like cookies. Let’s take PLEX for example. Lots of isk is being injected into the economy through b̶o̶t̶s̶ krabs, the playerbase expanded greatly with the introduction of alphas and now many people require plex to keep their L4 missions and rorq/supers running. This increases the CPI of eve’s economy, and as a result we pay more for PLEX.

Wow…

No. Just no.

First off krabbing does not have to inject ISK. Krabbing via mining or say invention can allow one to acquire ISK but not result in de novo ISK creation. Killing rats is the primary source of de novo ISK creation.

Second, when the price of one good goes up that is not necessarily due to inflation. Inflation is an increase in the general price level, not just one good.

Third, I’ve actually downloaded the PLEX data from a few days ago and the number of PLEX on the market has been going down. That, in and of itself, could cause the price to go up. If there are fewer PLEX being put up for sale on the market, then competition on the demand side would drive up the price.

@Nep-Neps

Of course, all of these are based on the assumption that the supply of PLEX isn’t decreasing, and by supply I mean the amount of PLEX bought daily.

What do you mean “bought daily”? Goods and services bought in a market are a function of both supply and demand.

@Nep-Neps

Go take your own macro/micro course.

I would suggest that perhaps you revisit your micro-economics course. You’ve clearly made a number of mistakes above. In particular, I’d suggest you look at the chapter on general equilibrium.

[Teckos_Pech]

Oh and @ISD_Buldath…another thread to merge into the catchall thread…

[NotTheSmartestCookie]

I approve of cookies.

[Nep-Neps]

I guess it’s impossible to make everyone happy, i’m a CS major so I don’t really remember all the exact terms and definitions in first year.

@Teckos_Pech

The number of cookies people have depends on the preferences of the 10 people regarding cookies and other goods in the economy.

Must I state that everyone likes having a single cookie?

@Teckos_Pech

So, it is possible that not everyone has a cookie…because those people value cookies such that they want no cookie and instead want other goods and services.

I was hoping that people like yourself would realize that the implication is that people want cookies, but just for you i’ll state that people want cookies and they’re a normal good

@Teckos_Pech

To get another cookie what must I give up in return…

Why do you care about opportunity costs? Does it actually matter here? If so state how

@Teckos_Pech

Again…no. If we argue that cookies are a necessity that is say everyone needs at least one cookie that has implications for the slope of the demand curve, at least in a particular region, it does not “drive up demand”.

Ok, sorry about my choice of words it’s been a while since i cracked open a macro textbook

@Teckos_Pech

Now your framework of a cookie vs. PLEX doesn’t work. It doesn’t work because there is a very good substitute for PLEX that is actually quite a bit cheaper: a subscription.

Ok, here’s the really juicy part. While it’s true that there is a substitute good available , it cannot be put onto the in-game market. Also, as a lot of people mentioned in other threads there are people who plex because they cannot subscribe (i’m like 30k in debt and i’m not even done uni). Therefore, it’s not a substitute good because not everyone can switch over to it. For the people that can, well they probably aren’t the majority of the people asking why plex prices are so high and why they can’t afford to plex.

@Teckos_Pech

but players who are trying to PLEX their account without such vast wealth are failing to appreciate the opportunity cost of time.

Yes, but that doesn’t suddenly make subscriptions a substitute good if they can’t buy a sub in the first place.

@Teckos_Pech

First off krabbing does not have to inject ISK. Krabbing via mining or say invention can allow one to acquire ISK but not result in de novo ISK creation. Killing rats is the primary source of de novo ISK creation.

I might be wrong, but isn’t krabbing specifically ratting and mining, well mining?

@Teckos_Pech

Second, when the price of one good goes up that is not necessarily due to inflation. Inflation is an increase in the general price level, not just one good.

Third, I’ve actually downloaded the PLEX data from a few days ago and the number of PLEX on the market has been going down. That, in and of itself, could cause the price to go up. If there are fewer PLEX being put up for sale on the market, then competition on the demand side would drive up the price.

Nep-Neps:

True, this definitely is true. However, if you look at AT ship or T2 BPO prices they have been trending upwards this past year. While it’s true that some of them die off and prices increase, even relatively low tier AT ships like the Hydra and the Freki that haven’t died in a long time have increased in price. Even T2 BPO’s have risen drastically, the Signal Amplifier BPO which i bought a year and a half ago for 10b is at least 15b now. There’s been no new injections of these goods, and relatively little loss but there’s been a huge price increase, which coupled with plex i attributed to a rising CPI.
T1 goods have fallen but that’s because the amount of minerals being produced far exceeds the amount being destroyed.
I don’t know about T2 goods or faction/deadspace stuff, so i’m going to leave that alone.
Also, yes lower supply does cause the price to go up but for simplicity i’m ignoring this issue. I don’t have time to bother pulling esi data out and then make a nice spreadsheet out of it.

@Teckos_Pech

What do you mean “bought daily”? Goods and services bought in a market are a function of both supply and demand.

By supply i mean the amount of plex being injected daily, is that better? I was worried some people might assume supply meant the supply of plex in eve currently. Instead, as you said, the supply is a function not a constant.

@Teckos_Pech

I would suggest that perhaps you revisit your micro-economics course.

Macroeconomics, i take it? Microeconomics focuses on a smaller scale, and when i’m talking about the entire market in eve most people would generally agree it’s macroeconomics

While I understand the importance of throwing big words like elasticity and marginal benefit and increasing opportunity costs, It’s also important to remember that I made this with the intent of helping people who never took a macro class understand why the market is working as it is and why it appears prices of certain things are rising

[Literal_God]

@Nicolai_Serkanner

@Nep-Neps

based on the assumption

And … we have another useless topic.

Are you ever not miserable? Your posts are like clouds of toxic gloom that mar an otherwise blue sky.

[Teckos_Pech]

@Nep-Neps

Must I state that everyone likes having a single cookie?

Yes, you should state it up front. It is a critical assumption.

@Nep-Neps

I was hoping that people like yourself would realize that the implication is that people want cookies, but just for you i’ll state that people want cookies and they’re a normal good

Just because I want something does not mean I’ll have that something. I want a Ferrari, but I’ll probably never own one because of opportunity cost–i.e. going out and buying one would mean giving up too many other things. So wanting and having are very different. This is true even for normal goods and evernsuperior goods…such as the Ferrari.

@Nep-Neps

Why do you care about opportunity costs? Does it actually matter here? If so state how

Holy mother of God…that is what it all boils down too ultimately. All costs are actually opportunity costs, some opportunity costs are explicit–i.e. they are included in the price, some are not (included in the price).

@Nep-Neps

Ok, sorry about my choice of words it’s been a while since i cracked open a macro textbook

This is a microeconomic concept.

@Nep-Neps

Ok, here’s the really juicy part. While it’s true that there is a substitute good available , it cannot be put onto the in-game market.

So what, it still effects the game market. That I have an option to exit the PLEX market is a powerful thing. I can “take my demand” and “go home”. This would, given a supply curve, generally reduce the price.* So if people who are PLEXing switch back to subs they basically will have a downward effect on prices.

It is the same with say lemons. My neighbor has a lemon tree, a number of branches hang in my backyard. I can, by law, pick them (in fact those lemons are mine not my neighbors). These lemons are “not on the market” but it effects the market none-the-less as neither me, my neighbor and those I give lemons too (this tree produces a massive amounts of lemons) mean we are not buying in the market and thus it influences the price.

@Nep-Neps

Yes, but that doesn’t suddenly make subscriptions a substitute good if they can’t buy a sub in the first place.

Yes, actually it does.

If you can trade 2 hours of your time for a subscription/Omega status vs. 45 hours of your time for Omega status the first option is probably better for many players, especially those without vast in-game wealth.

@Nep-Neps

I might be wrong, but isn’t krabbing specifically ratting and mining, well mining?

I suppose you can limit to these things, but mining itself does not create de novo ISK, so my point still stands.

@Nep-Neps

True, this definitely is true. However, if you look at AT ship or T2 BPO prices they have been trending upwards this past year.

So? The overall CPI, which CCP produces, has been generally flat.

@Nep-Neps

By supply i mean the amount of plex being injected daily, is that better? I was worried some people might assume supply meant the supply of plex in eve currently. Instead, as you said, the supply is a function not a constant.

You have to realize markets are a complex process. The amount of PLEX that are placed on the market are not all that people do with PLEX. Further, the PLEX that are placed on the market for sale in game are also the product of supply and demand. Saying something is fixed is a very strong assumption and can give you results that are generally not true.

@Nep-Neps

Macroeconomics, i take it? Microeconomics focuses on a smaller scale, and when i’m talking about the entire market in eve most people would generally agree it’s macroeconomics

No, microeconomics. You are talking about a particular market. Second you are making microeconomics errors. Macroeconomics went through an entire convulsion in the 1970s where the macro models were made consistent with microeconomics principles–aka micro-foundations.

@Literal_God

Are you ever not miserable? Your posts are like clouds of toxic gloom that mar an otherwise blue sky.

There are no blue skies in EVE.

*Except in the case you’ve assumed with a perfectly inelastic supply curve. In that case, supply is a vertical line for some fixed quantity. No matter what happens to demand the price stays the same.

[Nep-Neps]

@Teckos_Pech

Yes, you should state it up front. It is a critical assumption.

Ok, if that makes you happy we can for just for you assume that everyone likes having a single cookie, does that make it better for you?

@Teckos_Pech

Just because I want something does not mean I’ll have that something. I want a Ferrari, but I’ll probably never own one because of opportunity cost–i.e. going out and buying one would mean giving up too many other things. So wanting and having are very different.

So what exactly do you mean? You’ve successfully stated that wanting and having are different, but I don’t see the point of this? Please elaborate

@Teckos_Pech

Holy mother of God…that is what it all boils down too ultimately. All costs are actually opportunity costs, some opportunity costs are explicit–i.e. they are included in the price, some are not (included in the price).

First off, it depends on if you’re talking to an accountant or economist. Also, yes all costs are a combination of implicit and explicit opportunity costs but what does that have anything to do with me explaining how the economy works to people who, again, have not taken macroeconomics? I’m just explaining the reasons for increases in the price of normal goods.

@Nep-Neps

To get another cookie what must I give up in return…

was your original quote, but while it’s true that there is an opportunity cost for the cookie why does that matter? Does this increase the price of normal goods somehow?

@Teckos_Pech

These lemons are “not on the market” but it effects the market none-the-less as neither me, my neighbor and those I give lemons too (this tree produces a massive amounts of lemons) mean we are not buying in the market and thus it influences the price.

This is true, but your original good was that there’s a substitute good for PLEX. I’m not saying that it doesn’t affect PLEX prices, i’m merely stating that it’s not a substitute good. I completely agree that if less people used PLEX then it would be cheaper.

@Teckos_Pech

Yes, but that doesn’t suddenly make subscriptions a substitute good if they can’t buy a sub in the first place.

Yes, actually it does.

If you can trade 2 hours of your time for a subscription/Omega status vs. 45 hours of your time for Omega status the first option is probably better for many players, especially those without vast in-game wealth.

That first option is better for many players, but again there’s no substitute good. It influences the market indirectly. My point was only that subscriptions are not a substitute good because not everyone can afford to change to it.

@Teckos_Pech

So? The overall CPI, which CCP produces, has been generally flat.

This I understand, but I was using them because like plex they cannot be generated from in-game sources and thus I was using them as a benchmark.

@Teckos_Pech

Saying something is fixed is a very strong assumption and can give you results that are generally not true.

Yes, this all functions under assumptions. But this model also reflects some of the reasons why PLEX prices are high

@Teckos_Pech

No, microeconomics. You are talking about a particular market. Second you are making microeconomics errors.

Honestly, i took both courses first year so i don’t really remember at this point. You’re probably right about that

[Teckos_Pech]

@Nep-Neps

Ok, if that makes you happy we can for just for you assume that everyone likes having a single cookie, does that make it better for you?

Sure if we are talking about a model for cookies. If we are talking about PLEX, no. I have no PLEX and I’m a long time player. I even farm SP, so in theory I could buy PLEX, but I don’t.

@Nep-Neps

So what exactly do you mean? You’ve successfully stated that wanting and having are different, but I don’t see the point of this? Please elaborate

I can want PLEX, but I might decide having PLEX is not worth it in terms of other forgone opportunities.

@Nep-Neps

First off, it depends on if you’re talking to an accountant or economist.

Your post is entitled “How the Economy Works” you are talking about microeconomics (although using the term macroeconomics)…why should we suddenly assume you are talking about accounting concepts…which still include opportunity costs, but just the explicit kind?

@Nep-Neps

Also, yes all costs are a combination of implicit and explicit opportunity costs but what does that have anything to do with me explaining how the economy works to people who, again, have not taken macroeconomics? I’m just explaining the reasons for increases in the price of normal goods.

Because opportunity costs are pretty much 90% of economics (okay, I made up that percentage, but it is a significant factor…another factor is transactions costs, and I’d also say assuming that different groups of people are essentially the same–e.g. policy makers are not altruistic whereas businessmen are greedy and grasping).

@Nep-Neps

was your original quote, but while it’s true that there is an opportunity cost for the cookie why does that matter? Does this increase the price of normal goods somehow?

Because it represents the cost of the cookie…we need to look at costs…all costs.

@Nep-Neps

This is true, but your original good was that there’s a substitute good for PLEX. I’m not saying that it doesn’t affect PLEX prices, i’m merely stating that it’s not a substitute good. I completely agree that if less people used PLEX then it would be cheaper.

We are going around in circles, you brought up that “subs are not on the market,” I agreed. Now…what…the point is a sub is a substitute and a powerful one in terms of its effect on the PLEX market. We cannot ignore it.

@Nep-Neps

That first option is better for many players, but again there’s no substitute good. It influences the market indirectly. My point was only that subscriptions are not a substitute good because not everyone can afford to change to it.

It influences the market directly. Suppose I’m paying for Omega status via PLEX. I leave and go get a sub instead. What does that mean. All my demand for PLEX “leaves”. That shifts the demand curve inward. This is true for each player who follows me. In the end it could be a large effect. This is why the run up in prices for PLEX faces some serious issues to keep going indefinitely.

@Nep-Neps

This I understand, but I was using them because like plex they cannot be generated from in-game sources and thus I was using them as a benchmark.

Pretty sure PLEX is in the CPI calculations.

@Nep-Neps

Yes, this all functions under assumptions. But this model also reflects some of the reasons why PLEX prices are high

In your model, but not necessarily in reality. That is a key difference.

@Nep-Neps

Honestly, i took both courses first year so i don’t really remember at this point. You’re probably right about that

Well, that you are thinking about it and trying to work it out is better than most people. If you still have your text books…look them over. Or try wikipedia, it’s pretty good for mainstream stuff.

[Nep-Neps]

@Teckos_Pech

Sure if we are talking about a model for cookies. If we are talking about PLEX, no. I have no PLEX and I’m a long time player. I even farm SP, so in theory I could buy PLEX, but I don’t.

@Nep-Neps

If there’s only 10 cookies and 10 people in the society, then everyone gets their cookie and everyone’s happy. If there’s 20 people in the society however, then there’s not enough cookies for everyone. In this case, people will outbid each other in order to buy that cookie which drives the prices up.

This is true, but i never mentioned PLEX in this. I was merely showing an example of how when demand is greater than supply the price increases

@Teckos_Pech

I can want PLEX, but I might decide having PLEX is not worth it in terms of other forgone opportunities.

This is true, but your original statement was

@Teckos_Pech

So, it is possible that not everyone has a cookie…because those people value cookies such that they want no cookie and instead want other goods and services. This assumption that everyone has a cookie is very restrictive.

Now, if you want to start out in an economy where everyone starts out with an endowment of one cookie and then engage in trade that’s fine. But that is not what you are doing. Oh, and if you are going to do this…have at least two goods so there is the notion of a trade off. To get another cookie what must I give up in return…

But i mentioned

@Nep-Neps

Finally, let’s assume cookies are a necessity to live. This both drives demand up and at some point the cookie sellers will think “Hey, if I increase the prices of my cookie people will still have to buy it because they need it”. They can increase the price to whatever they want, as long as people can afford it, which further drives prices up.

Lots of people with multiple accounts require PLEX to keep going, and for them paying hundreds of dollars isn’t an option so subscriptions are not a substitute good for them. Sure, they do have to pay an opportunity cost but isn’t that for all things in life?

[quote=“Teckos_Pech, post:14, topic:148313”]

Also, yes all costs are a combination of implicit and explicit opportunity costs but what does that have anything to do with me explaining how the economy works to people who, again, have not taken macroeconomics? I’m just explaining the reasons for increases in the price of normal goods.

Because opportunity costs are pretty much 90% of economics (okay, I made up that percentage, but it is a significant factor…/quote]

Wait, i still don’t understand how opportunity costs are increasing the price of normal goods. So let’s say part of my opportunity cost of playing eve is that I could’ve used that time to study. That drives up the in-game costs of plex?

@Teckos_Pech

That first option is better for many players, but again there’s no substitute good. It influences the market indirectly. My point was only that subscriptions are not a substitute good because not everyone can afford to change to it.

It influences the market directly. Suppose I’m paying for Omega status via PLEX. I leave and go get a sub instead. What does that mean. All my demand for PLEX “leaves”. That shifts the demand curve inward. This is true for each player who follows me. In the end it could be a large effect. This is why the run up in prices for PLEX faces some serious issues to keep going indefinitely.

Ok, but again how exactly are subscriptions a substitute good for people who can’t afford it?

@Teckos_Pech

Yes, this all functions under assumptions. But this model also reflects some of the reasons why PLEX prices are high

In your model, but not necessarily in reality. That is a key difference.

This is true, but for people who don’t have the faintest grasp of economics this is a starting point

[Khergit_Deserters]

A lot of people playing MMOs don’t have the faintest grasp of how economics work. And a lot of them playing this MMO are Alpha account people checking the game out. Some of them wouldn’t even realize that prices in EVE depend on market forces. So I’d say o7 for the post, OP.

And also, many people may not know that there are people in EVE with a trillion ISK, all gained through legitimate (and to me, arcane) market playing/manipulation methods. Unsung heroes of EVE, IMO.

[Xuxe_Xu]

OP, may I suggest that if it is your intent to communicate your economic ideas to a wider audience that you simplify your post?

Occam’s Razor in action and all.

Opportunity cost is a big factor in many if not most things.

I’m sorry you will have any student debt at all. As a university education (and any job training, for that matter) is to the benefit of a society as a whole, I think the society should see it as an investment in itself and the individual shouldn’t be burdened with the cost. Not the subject at hand nor really appropriate for the eve forums anyway, so I’ll stop there.

[Teckos_Pech]

@Nep-Neps

This is true, but i never mentioned PLEX in this. I was merely showing an example of how when demand is greater than supply the price increases

I know, I was pointing out how your initial model does not extend to PLEX.

@Nep-Neps

Lots of people with multiple accounts require PLEX to keep going, and for them paying hundreds of dollars isn’t an option so subscriptions are not a substitute good for them. Sure, they do have to pay an opportunity cost but isn’t that for all things in life?

I have multiple accounts…so this assumption is dubious.

Look, the idea that everyone needs a PLEX or a cookie is extreme. Drop it and modify your model/narrative.

@Nep-Neps

Wait, i still don’t understand how opportunity costs are increasing the price of normal goods. So let’s say part of my opportunity cost of playing eve is that I could’ve used that time to study. That drives up the in-game costs of plex?

Opportunity cost is to a large extent economics. It is all about people with different degrees of opportunity cost coming together and making advantageous exchanges. At least that is a large extent of economics. Add on transactions costs, public choice, and a few other things that you’ve covered quite a bit of economics.

@Nep-Neps

Ok, but again how exactly are subscriptions a substitute good for people who can’t afford it?

If you can’t afford a subscriptions, chances are you can’t afford to PLEX either unless you are already fabulously wealth in game.

@Nep-Neps

This is true, but for people who don’t have the faintest grasp of economics this is a starting point

Starting with a bad economic model is not a good idea unless you are going to quickly transition to a better one. And the assumption of “Everyone needs to PLEX their accounts” is really bad when there is a cheaper option for the vast majority of players.

[Rich_Darine]

Eat the cookie

[Teckos_Pech]

Jesus Christ…now we have inter-temporal choice and depreciation. Thanks alot!