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Law of Supply and Demand

It's hard to accept the law of supply and demand. It is far easier just to look at prices and consider them to be the best way to predict future trends. If something looks profitable today, then we just assume it's going to look the same tomorrow.

Price is a direct result of supply and demand. There is no way to increase the price of an item without first affecting the supply and/or demand. The best way to think of this is a scale. When the scale is balanced, equal demand and supply, then the price settles at an equilibrium. If you add more demand than supply, the price rises. If you add more supply than demand, the price drops.

To predict how prices will react to changes in supply and demand, you need to simply compare future situations to the current one.

This is true for weekly cycles, game updates, and even daily cycles.

Most people only look at the price and use that as the sole measuring stick for determining what to do next. If, for instance, they see black lion chests at 40 copper (as we did during halloween), they will remember that at one time 3 copper was the normal price, so they'll sell. What they neglect to realize is that this change was entirely predictable. All you have to do is look at supply and demand. The supply of chests didn't change, but new items were added to them that were desired by the players. Equal supply, higher demand means higher prices. These same people could have purchased thousands of Black Lion Chests and made an absolute killing.

As players get the items they wanted out of the chests, or just lose interest in trying, then demand goes back down but incoming supply remains the same. This leads to a gradual oversupply of chests and the price dropping (we're seeing that now).

But remember that chests, along with the mystic forge, are the two ways that ArenaNet seems willing to utilize in changing the economy. So you can bet your britches that a new item will be added to black lion chests soon enough, and that will lead to massive demand once more.

I very rarely look at the current price when I speculate on anything. It doesn't matter to me if the price was up or down a week ago. All that matters is the different amount of "sand" that's going to be applied to the scales of supply and demand. If an item's demand is going up this weekend, then I don't care about the history of its prices. All I care about is the fact that demand is going up and supply isn't increasing to meet that demand. The price WILL go up, and so I buy despite the fact that prices could right now be higher than ever.

I believe that too many people get suckered into watching trends and plotting on a graph where markets will end up. It's the falacy of studying economics as a mathmetician, when you should be viewing it as a branch of psychology. How people react to numbers is more important than guessing how numbers will change.

I hope this helps people get out of the mindset of looking at prices instead of the forces that drive those prices. Supply and Demand is all that matters. Not the price.

3 comments:

  1. Anonymous said...:

    Insightful article. Applies to real life as well

  1. Anonymous said...:

    Interested to where you think supply/demand applies to what has happened with certain materials recently. Elder Wood logs/planks were doing a pretty good flip for me a few days back - buying 3 logs at around 99-108 copper, selling planks anywhere from 135-150 copper. The prices were dipping a little though, so knowing I was going to be away for 3-4 days I pulled my stock (listed around 138) and relisted at 133. I come home to find nothing sold and the bottom of the market (heavily stocked) at under 100c

    Given that the only major change I know of is the first wave of bot bans (driving many of the crafting drop items up), what's your take? Do you think a sudden spike in supply is feasible or did demand start to dry up as crafters couldn't get the other mats thy needed?

    No complaint here, I was aware of the risks, but boy was it a shock to log in and find that!

  1. Anonymous said...:

    About the elder planks. They have been on a general decline since late November. http://www.gw2spidy.com/item/19709
    I think come the new content on the 18th the planks might jump back to around 1.20-1.50. However the graph shows that price changes quickly over one day so I think you would get undercut before you shift a large quantity.

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