EVE Economics: Understanding Curves

 
Spreadsheets in Spaaaaaacccceeeee — EVE, at its very core, is an economics simulator. Progress, as the trailer for Inferno (below) says, is numbers. And these numbers are the drivers of the market. Apothne has been writing about Ishtars, and anyone travelling through Jita and taking a passing look at the market will note that Ishtar prices are once again rising as the ship comes back into the fore of the meta. This is one of the basic concepts of economics and what we’ll be discussing today. The three main topics will be supply and demand curves, elasticity of the market, and the utility of the ISK that is being spent. The primary focus of this article is to assist new bros in their climb to market domination, and also explain why new ships are so ridiculously expensive, but often flat-line out a month or two later.

“Colonies burned, ships destroyed, people killed and money earned. It all comes at a price.”

What is Economics?

Often referred to as the “dismal science”, economics is the study of the processes that govern the production, distribution, and consumption of goods and services. The Scottish writer, historian and essayist Thomas Carlyle was the first to coin the moniker, inspired by the prediction that population would always grow faster than food, dooming society to starve itself. Part finance, part sociology, economists try to explain why choices are made in certain market environments. EVE is unique in that it’s often very easy to explain why some things happen, such as the rising cost of PLEX or the rising cost of Ishtars. Of course, there are still market irregularities that make people scratch their heads in confusion. Perhaps it’s just the desire for the opulence of wealth that drives people to do silly things like this. Without directly contacting the person, no one will really know. To better study things, economists in the real world as well as in EVE, like the former CCP employee Doctor Eyjólfur Guðmundsson, make assumptions. The basic assumption is that humans, and therefore players, are fulfilling their own self-interests, and act rationally in their efforts to fulfill their goals. These assumptions are where sociology comes in. While it is mostly based on graphs and numbers, understanding why and how people act helps to explain the reasons behind the why. There are two key concepts of economics that need to be explained before we can get into the nitty-gritty of how the EVE economy works. One is the matter of perspective. Typically, college economics courses are divided up into macro- and microeconomics. As the name suggests, one looks at the big picture, usually nations, countries, or in some cases the entire world; while microeconomics typically focuses more on individual people and firms, and how they operate within a macroeconomic environment. For the purposes of this article, we’ll typically be focusing on the macro-market of Jita, but also in EVE in general. It should be noted that this is SIGNIFICANTLY different than how you would optimize your personal corporation/alliance to fit into the market. The other concept, and the real heart of economics, is the understanding of scarcity. Scarcity is the tension of limited resources versus one’s unlimited desire or need. It’s this concept that causes PLEX prices to continuously rise and fall in price. Players of EVE want cheap PLEX, but a cheap PLEX isn’t always available, and therefore the market shifts up as demand increases, and shifts down when players don’t. The more players actively seek PLEX, the less available cheap PLEX will be, thus driving the price up again. Because of this scarcity, players are forced to make a decision. Is it easier for them to rat/mine/PvE a little bit more and earn the ISK price of the PLEX themselves, or is it easier for them to throw $19 at CCP and skip around the volatile PLEX price. Economics is all about understanding the decisions we make and understanding how society optimizes the allocation of resources. (ISK and time, in this case.)

Supply and Demand

Skipping over some of the “boring” parts of economics, such as growth, opportunity costs, etc., let’s jump straight into what makes the market economy, and EVE, work. Demand is how much of a product is desired by the collective purchasers. The quantity of this number is the amount of a thing that people are willing to buy at a fixed price. There is a relationship between price and quantity demand, referred rather pedantically, as the Demand Relationship. On the opposite side of this, is supply. Supply is how much the EVE market can offer to the purchaser. If there is no one mining Tritanium, the supply will be small. If everyone is building Ishtars, than the supply will be high. The quantity supplied refers to the amount the market can supply at a certain price. The correlation between price and how much of an item is supplied to the market is known as the Supply Relationship. It’s fairly obvious now, that price is a direct reflection of supply and demand. In macroeconomic theories, supply and demand will allocate resources in the most efficient way possible. It was one of our assumptions, and is also known as the “invisible hand” of the market; forever correcting itself to bring the price to the correct amount. In reality, what is known as the “invisible hand” is really the vast number of suppliers and purchasers playing tug-of-war with the price until it settles into a comfortable, and stable, position. If you’re ever bored, you can go to Jita and watch as the price of Tritanium, a specific ship’s module, or really anything, does this adjustment. Things will slowly tick up in price as more is purchased, and tick down in price as more is supplied.

The Law of Demand

nsurGhm So, why does the price of something, say Zydrine, decrease as more of it is available? One of the economic laws is that, assuming all factors remain the same, the higher the price of an item, the less people will demand that good. In practical terms, if Zydrine was 900 million ISK per unit, only a small number of players would be able to purchase enough Zydrine to build a ship. The higher the price, the fewer number of people would be willing to purchase that product. On the reverse side, if Zydrine was 0.01 ISK per unit, everyone would be able to purchase copious amounts of Zydrine, but there wouldn’t be any real reason for someone to mine Zydrine. In general terms the Law of Demand is a downward slope, the higher the price, the lower the demand will be on the market.

The Law of Supply

So if the Law of Demand is a downward slope, with the higher priced items selling for less, than the Law of Supply is an upward moving slope. The reason for this is the more a product can be sold for, the more people will be eager to sell said product. To use the Zydrine mark-up again, If it was possible to make 900 million ISK on one unit of Zydrine, *everyone* would be out mining Zydrine. A one to two minute mining operation would yield amazing returns, assuming you could find a purchaser; let’s assume that we can. This may seem counterintuitive, especially when compared to the Law of Demand; if there is more of it, shouldn’t it be less? The answer is yes, from a demand side. The price will be less, but we as rational EVE players will want to get the most ISK for our product. It wouldn’t make a lot of sense to sell an Ishtar, or anything else, at a loss. As a supplier we will want to maximize our gains. Also it makes sense that if we own the vast majority of a thing, we’d set the price as high as possible.

The Supply and Demand Relationship: Elasticity of the Market

So now that we know the laws of Supply and Demand, let’s look at how supply and demand affect the price in EVE. Recently CCP announced the release of the new Minmatar T3 destroyer – Svipul. After the announcement, many industrialists and market players watched Singularity (SiSi) like a hawk for the first bits of information on what would be required to make one. The reason is that the market manipulators and suppliers will start to stockpile the component parts. This stockpiling and creation of scarcity will naturally cause the price to increase, as described in the Law of Supply. At first, when a new item is introduced to the market, sales will be low, but high in returns. As more and more channels of supply open up, natural competition will drive the price lower and lower, which in turn spurs more and more people demanding the product, keeping the price at its “natural” levels. For a hands on, practical example, let’s review the release of the Confessor.
Confessor
Confessor:  Tech 3 ships, like capital ships, are made up of component parts that are made up of other sub-parts. In the case of capital ships, minerals are used to create capital components, such as capital cargo holds, or capital construction components. Each one can require several million ISK to build, and ultimately is the reason why capital ships are so expensive to make. Similarly, T3 ships are made up of T3 components that are created using salvage from Sleeper ships and harvestable gas clouds from Wormhole space. As we can see from the industry tab of the Confessor, there are eight separate components that need to be created for a Confessor to be constructed. Luckily, only one or two each of these components are needed, with the exception of Metallofullerene plating which needs eight units. Each one of these has their own market, and as a result, dictate various pricings throughout the days, weeks, and months. To understand why the Confessor started off at a 3 billion ISK peak, let’s take a look at the price and spike of Warfare Computation Cores on the Jita market. tzei1fU Prior to December, the average cost of the Warfare Computation Core was under one million ISK. There was a momentary peak in July due to other factors, but we can see by the graph that the major spike was around the time of the Rhea release, and the introduction of the Confessor. Because a finite number of people were holding onto the majority of the supply, they were able to almost triple the price per unit. As more players realized the profit that could be made, the competitive market began to reduce the price per unit. This is due in part to people with the vast stockpiles of the Warfare Computation Core attempting to sell off their stock. While they always have a high potential cost, the actual cost is always going to be lower, as people will demand more for less. Where these two meet, the supplier and the purchaser, is at a point known as equilibrium. There is also dis-equilibrium, but in the context of EVE that rarely occurs. Another factor in why the Confessor’s original price was so high is due to how they’re constructed. All T1 ships, and some T2 variants, have a BPO. BPO stands for Blueprint Original, and can be researched to 10% Material Efficiency and 20% Time Efficiency. Blueprints are used by players to create nearly everything in New Eden, and are one of the driving factors on why something is expensive or not. Capital and super capital BPOs can be billions of ISK, and even well researched battleship BPOs can also be quite high. However, because they are originals, they can constantly produce more. Blueprint copies, or BPCs, are basically licensed runs from an original. Most T2 manufacturing today is done through research of T1 originals that generate T2 BPCs. These limited runs physically reduce the supply of ships to the market.
Confessor-BPC
To reduce production even more, T3 hulls, like the Confessor, are only found on drops from sleeper data and relic sites. This requires players to farm data sites in wormholes in the hopes of finding one of these “elusive” BPCs. It should be noted that this is a very broad overview of T3 research; reverse engineering wasn’t mentioned, which is another step in this very long process. As a result of this natural bottleneck, and because the Confessor was so new, there was a natural time buffer between the release and creation of the first Confessor. As more BPCs were found, they quickly were thrown up into contracts. As more and more supply was provided, the demand for a 500 million ISK BPC dropped, and the demand for a much cheaper BPC increased.         Looking at the first 10 days of the Confessor being available, we can see a step-by-step dramatic decline in price. ozzDK4t From the tenth to the eleventh, the value of a Confessor on the high-end, halved from just short of 3 billion ISK, to 1.5 billion ISK. From the eleventh to the twelfth it halved again, and so on until the base price of the ship was only slightly above the value of the materials to make the ship. The same trend can be seen in the past month, dropping from 150 million ISK to a mere 50 million ISK. When the Confessor was originally announced on the forums, CCP had predicted around 40 million ISK for the ship cost. As more and more players work to manufacture and create the ship, the price will continue to drop. As stated before, this is because there will be a larger supply of Confessors available, and the demand for an expensive Confessor will be less than the demand for a cheaper Confessor. Q49Q4Pe

Conclusions

Hopefully this article has given you some insight into the EVE market, and in turn, how to be better industrialists and market speculators. There is still one unanswered question, however. Who would be silly enough to buy a Confessor at three billion ISK, if they could just wait a month and get it for a fraction of the cost? That question brings me back to the amazing Inferno trailer. Some people have the ISK to burn, and others have the drive to be the first. Put those two things together, and you end up with this. Does anyone know Anomilk Dairylover? Probably not; a Rifter versus the brand new Confessor between corp mates isn’t really a notable first kill. But what it is, is the very first kill by a Confessor on Tranquility, ever. Seven people commented and congratulated the first Confessor kill. Know how many talked about second place? None. But don’t worry, Yuki purchased his fame in other ways; namely in being the first one to lose TWO Confessors in the first 24 hours they were on TQ. So maybe that part about EVE players being rational needs to be re-evaluated.
Tags: economics, Georgik, industry, manufacturing, market

About the author

Georgik Sojik

Georgik is a Sniggwaffe graduate and Habitual Euthanasia member who dabbles in wormholes and industry to support a disturbing obsession with kpop which prevents him from investing any more time than he has to in funding his mediocre PVP activities.


  • Kamar Raimo

    Nice explanation on how prices develop and an enjoyable, well-written piece.

    I would like to point a few things out though:

    “In macroeconomic theories, supply and demand will allocate resources in the most efficient way possible” – Isn’t that the subject of microeconomic theory?

    The “Invisible Hand” is actually the postulation that even though economic actors will follow their personal interest, the dynamic of supply and demand on a free market will result in universally beneficial results iirc.

    Also, although you introduce elasticity, you do not quite explain what it actually is i.e. the measure on how demand or supply react to change in prices.

    Sorry, I am currently in exam correction mode during those last two weeks 😛

  • Alan Mathison

    Georgik, I just wanted to thank you for a great article. This is the kind of thing that makes New Eden real and why its studied by professional economists. You had good explanations and great examples. I especially liked your ending.