EJ's Lesson on Deflation and Oppurtunity Cost

As both an avid investor and avid Wow player, I find a great deal of parallels between the markets in the world and the markets in the world ... of warcraft. Right now, RL markets are still in a great deal of trouble and its difficult to predict where either are heading. Our retirements may not depend on the price of goldclover, but if we miss out on a market move in the auction house it can erase a lot of hard work and create many hours of more mindless farming instead of hours playing bg's or (dare I say) something other than WoW.

There are two specific things I would like to focus on in this post, the first being a phenomenon called deflation. Deflation occurs when there is downward pressure on prices and your money can buy more today than it could in the past. This happened earlier in '09 when the market tumbled and prices were falling. Similarly, it happened when Wrath of the Lich King went live and prices for everything dropped through the floor. Everyone stockpiled everthing they could, thinking demand would skyrocket. They were right; demand sky-rocketed but supply grew even faster and outstripped demand. Consequently, prices collapsed and the people who made out like bandits (like myself) were the ones that stockpiled gold and didnt both buying items. That same amount of gold now bought more goods than before.

The second item to discuss is opportunity cost. Basically, this is the cost of any decision when you could have made alternatives. So for example, I invested gold to buy eternal fire and resold them a week later for 20% more. This sounds good, but I could have spent the same amount of gold buying bolts of frostweave and in that same amount of time the price for that went up 35%. So although I made gold by investing in eternal fire, I had an opportunity cost of 15% by missing out on a better deal. If a majority of people were to take advantage of the better rate of return, then I technically would have lost money. Senarios like this happen every single day on servers, so it's important to not just make gold, but to make as much as possible. Remember, if everyone else doubled their money, and you only got 10%, are you really a winner? When people have more gold they are willing to spend more for the same stuff, and prices are going to go up. Can you keep up with prices doubling? Not on a 10% rate of return - you're gonna get smoked.

Remember to watch out for two things: prices unexpectedly falling, and a better rate of return. The first doesn't come often but can make you lots of gold. The second is almost always out there, you just need to look for it - and looking here is a good start.

Good Luck,

Ej of Onyxia

6 comments: on "EJ's Lesson on Deflation and Oppurtunity Cost"

  1. Finally some quality advice on this blog!

  2. The biggest thing that can be said on the subject of opportunity cost is as it pertains to materials and crafting.

    Opportunity cost is why the "I farmed the materials so they were free" people are wrong...

    if you farmed the mats - they are still worth what they sell for on the AH - since you can always post them on the AH and sell them for that price

    Thus coming to the correct conclusion - if you can't buy the materials for crafting something from the AH and make a profit, then it's not worth crafting that item to sell it - just farm the mats and sell those instead

  3. Hmm, despite (or thanks to) the fact that this is one very nice post, I don't really like it. Since it made me even more aware of the fact that there is always room for improvement.

    I just wish I had more willpower to try and get the maximum out of the AH, although I am definitely not doing bad, it just feels very mediocre. Guess, I'll try to increase my effectiveness as my next goal :).

  4. Thechnicaly it's true that if you don't make the best deal, while others do, your buying power decreases. While you were #1587 richest man before the deal, after it you'll be #3215.

    However most of the people of the server don't make any deals but farms mobs or daily quests. As long as you make decent deals, you'll be richer than them.

    The difference between the "best" and the "other good" deals is that you won't be in the top 0.1%, just the top 5%. I would not call it "poor".

  5. I was worthless until I was sold
    Once you purchased me,
    You made me Wow Gold.
    Now everyone wants to Buy wow Gold.

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