Most people have a general idea about the basic economic principles of supply and demand. If something has a higher demand, you can usually get away with charging a higher price. If a market at a hub gets ‘flooded’ with supply, then usually the prices drop as competitors try to get their item on the top of the market sell orders.However, supply and demand is a lot more complicated, and understanding some of the more complexities of it can help you become a more successful trader. (It can also help you out in the real world!)
First, lets dive into some real world terminology, and analyze how we can apply it all to Eve.
I promise it’s a lot more interesting then it sounds!
Supply
Supply, as defined by Wikipedia, is “the amount of some product producers are willing and able to sell at a given price…” In Eve Online, the supply would be the sell orders on the market, with the suppliers being those who put up the orders.
Almost everyone is a supplier at some point in Eve Online. You have miners selling minerals on market, and manufacturers selling products they’ve built. Then you have pvpers and pveers selling various drops and loot, as well as traders moving supply between stations.
Demand, as defined by Wikipedia, is “the desire to own anything, the ability to pay for it, and the willingness to pay.” In Eve Online any purchasing of goods from the market or contracts is demand.
Analyzing demand is one of the most important aspects of trading in Eve Online. A lot of the articles I’ve written in the past about looking at buyers’ psychology, researching the politics of a market, etc. all are a part of looking at the demand and what is currently affecting it.
Equilibrium
I’m going to camp here for a bit, as this is where traders start to ignore some fundamental economic principles.
If you look at the above graph, equilibrium is where the supply curve and the demand curve meet. Selling your item at this price is where you will make the most profit. You will notice that this is NOT where the price is the highest, or where the demand is the highest!
Many traders try to sell their items for the highest price that they can, thinking that the higher the profit margin per unit, the more overall profit they will make. This is not the case!
For example, Joe is a trader. He has noticed that one of his trading stations has no Hurricanes for sale. However, there is plenty of pvp in the region so Hurricanes must be in demand to some extent. He decides to put a few on the market for 3 million isk marginal profit to see what happens. They sell really fast! So, he puts a bunch more up, this time jacking the price up so that he’ll be making a sweet 15million isk profit off each unit. They sell over a period of several weeks and he thinks he has hit a jackpot!
What he doesn’t realize, is that he just sold 5 Hurricanes in 4 weeks at 15million isk above Jita prices, for a total of 75million isk profit, when he could have sold 30 hurricanes in 4 weeks for 3 million isk above Jita prices for a total of 90million isk profit.
Overall profit is more important, and will make you more isk in the long run then the individual profit margin of one unit.
Supply Chains
Supply chains are all the people an item had to go through to get to a customer. Some supply chains are really long, starting with a miner in a remote systems mining minerals for future production. Other supply chains are short, such as a PVEer acquiring a reward or loot from NPCs.
In general, the shorter your supply chain the higher the profit is for the trader at the end. This is why it’s a good idea to form relationships with manufacturers to help boost your marginal profits. Also, purchasing materials and building some things your self can lead to higher profits.
Wholesalers
In general, wholesalers are people who sell items (usually in bulk) to other suppliers who then trade the item on the market. There are chat channels and mailing lists set up in Eve to connect wholesalers and manufacturers with traders.
But, I will tell you a secret. There is no such thing as wholesale in Eve. It’s a gimmick. Check out some of the prices that the so called ‘wholesalers’ advertise their goods at. Sometimes, they are more than standard Jita prices!
Most of the time, purchasing wholesale in Eve for resale will not generate very big profits. However, it is a good mind game to play with other traders. ;)
The Line Before the Bottom Line
Now that I’ve said all this, you’ve pulled out your spreadsheets, opened your fifty market alts and are ready to get to work to calculate equilibrium and make the highest profit you possibly can! Only…there’s a slight problem.
Equilibrium is…sorta kinda theoretical. There are too many factors involved. Too many subjective factors involved that can’t really be measured such as: laziness, greed, feelings at the time. There are too many unexpected factors such as server downtimes (okay that might be more expected then not…) political upheavals, etc. that greatly affect equilibrium but can’t really be predicted or measured all the time.
In Eve, finding equilibrium is often a matter of trial and error. You start with a higher price and lower it until you find a good place where people seem willing to purchase the kind of quantities you want to sell. Then, you can experiment. Offer complimentary items and see what sort of impact that has on the demand. If the demand goes up, so can your price!
The Bottom Line
Now that I’ve completely crushed your hopes and dreams by telling you there is no such thing as wholesale, and that equilibrium is impossible to pinpoint, what on earth can you gain from this information?
Lets go over Wikipedia’s “four basic laws of supply and demand.” Maybe they will help. I will put them in terms of Eve Online.
1. Greater demand, same supply. A war has broken out and people need more ships, darnit! Equilibrium price goes up.
2. Less demand, same supply. PL has evacuated your null sec systems to move to low-sec and now you have all this stuff to sell and no one to sell it to! Equilibrium price falls.
3. Greater supply, same demand. Several PL dudes give up at pvp and turn to empire to do some mining and manufacturing. They increase the supply of ships in a market, but they don’t kill anything so there’s not really any more demand for them. Equilibrium price falls.
4. Less supply, same demand. Chribba goes on a month long vacation and the amount of tritanium on the market in Amarr falls through the floor, but people still need it! Equilibrium price goes up.
If the equilibrium price goes up, you can safely charge a higher PPU to gain more profits. If the equilibrium price falls, then you will need to drop your price in order to maximize your overall profits.
Don’t charge more than equilibrium or you won’t maximize your profits.
You can’t really find equilibrium.
Sound complicated and circular? Welcome to Eve economics. Don’t worry, if things go too far south CCP can always print more ISK
Nice article. One point I would like to expand on: "Overall profit is more important, and will make you more isk in the long run then the individual profit margin of one unit."
ReplyDeleteThis is true as far as it goes, but when you look at profit, be sure you consider net profit, not gross. You have to allow for trading fees, hauling costs, potential losses due to market fluctuations and the biggie that a lot of people omit: the opportunity cost of your time. If you spend 3 hours buying, selling, hauling etc to earn X profit, how much could you have earned in those 3 hours trading something else, or doing something else like mining or missioning?
When I manufacture or trade for each item I calculate 4 factors:
1) net margin (both isk and %), this is important because along with volume it goes to calculate my profit, but I also look at the raw margin in consideration of expected fluctuations in the price of that item. If my margins are too small and the price drops I will be making a loss irregardless of volume.
2) return on investment (as %), important as I will have isk tied up in stock. Could that investment be earning me more elsewhere?
3) isk/hour, realtime. How much profit I will make in a given amount of real time. Obviously this is the main thing I am trying to maximise and considers both margin and volume. It is effectively the "overall profit" already mentioned.
4) isk/hour, my time. This is a similar calculation, but with respect to the opportunity cost of my time as a player. I can't play 23.5/7, so I prefer to maximise the earnings for the time invested.
I do not have a hard formula to caluclate weightings for these factors, nor do I calculate them overly frequently (as that is another opportunity cost), but I do consider all 4 when I am chosing products and prices.