Patch 5.4 patch notes
Virtual Realms feature revealed
The Proving Grounds are coming
The latest patch 5.4 newsTime Is Money: Are materials you farmed free?
by Basil Berntsen 
Mar 15th 2010 at 5:00PM
Opportunity cost
If you farm herbs, you mill them, create inks, and then use those to make armor vellum, those vellums are not free, nor are they the cost of the vendor paper. The farmed materials can be sold a certain amount, and many people neglect to factor this. Farming feels like getting something for free -- after all, you're playing a game, and then when you finish playing, you have goods you didn't have before.Opportunity cost is, simply, what something would have been worth had you done something differently. The opportunity cost of going to law school is not the tuition, but the money you would have made had you not been studying law. Add that to the direct cost (tuition, books, bribes, what have you), and you get the total cost. Compare this to the profits at the end of the run to determine whether it's worth it.
In game, the opportunity cost of using goods you farm (or earn, or get for free), is what you could have sold them for. Of course, if you are processing these farmed goods in some way, you are probably doing it to increase the final amount of money you get. If you still have to farm, this can be a valuable use of your time. If, however, you find yourself having to cut your prices below that the value of the unprocessed goods, you're officially wasting your time. You just took your mats, spent time to turn them into a finished product, and are now selling it for less than you would have gotten by not bothering.
Never tell yourself that you can afford to go below the total cost of your product just because you farmed for the ingredients of whatever you are selling.
Why argue?
I generally don't try very hard to convince people about this. Instead, I'll just buy their underpriced stuff and ask them to go farm more for me. This is probably the most effective way to demonstrate the principle of opportunity cost. They may feel that their cost is, say, half of mine, but when they run out of stock, they realize that their cost is really going to be based on the market value of their farmed goods.
Being an auctioneer is like being able to print money. Or gold, as it were. Wait, that doesn't make sense... you can print on gold, but you can't print gold. That would be closer to transmutation? I can transmute titanium, but that's only worth it if the price of saronite is low enough to justify the time spent making it. I need some sort of analogy here. Whatever, I'll figure it out later. Making gold? Periodically, Time Is Money will give you short tips on how to make money. Filed under: Economy, Time Is Money
Reader Comments (Page 2 of 5)
Jafari Mar 16th 2010 3:19PM
About collusion and oligopoly:
During BC, there were about five tailors on my server making netherweave bags in bulk on the AH. They netted me about 3 or 4 gold per bag and about ten a day nearly always sold in one posting. The gold paid for my repairs in PvP and over the course of a few months, my spellfire set (I kind of miss having it take weeks to get an item upgrade, but then again, I don't...). I bought the cloth off the AH instead of farming it (although I would also incidentally get a bunch of cloth because I was grinding Scryer rep), so my cash profits were easy to calculate. I would not buy cloth over a certain price because I knew that I would not profit from it (unless there were no bags posted at all and I could price a little higher that day).
Well, one day I got undercut by a single player, so I undercut him. And he undercut me. And so on. It got to where I was making a little less than 1 g per bag.
So what I did was I put him in my friends list and waited until we were both on. I whispered him with something like, "hey, we are in a price war, it's getting crazy." He immediately recognized my name and wrote back, "yeah..." I asked him if he wanted to fix prices and trade days on the AH and he went for it. It only lasted about two or three weeks or so, but we ended up keeping prices higher for a while. We agreed that if a person posted lower than us, we'd both flood the market for a day with low-profit sales, or if they were low enough, we'd buy all the bags on the AH. Overall, it was interesting because I think we probably ended up not making much more money on the higher sales, but it was certainly fun to have our little two man "cartel."
Eisengel Mar 18th 2010 3:51PM
@Jafari
I did something similar to this during Vanilla WoW. I had an Herb/Alch and someone in my guild would routinely help me out by farming up herbs and sending them to me. I noticed that the prices on the highest health pot at the time were a little low, and I had a massive supply of herbs. I asked the guy sending me herbs to only farm the herbs for that pot.
I then had a huge supply of the health pot mats and would post health pots at a higher price. I'd also bid on everyone else's auctions so that they would cost more than mine. If I won the auction, I'd have more supply, if I lost, then someone reinforced the higher price. This was when average prices calculated by auctioneer-like add-ons were followed religiously. For about a month and a half or so I completely monopolized the Superior health pot market. I started moving down into the Major health pot market and inflating those prices as well as the price of herbs for the potions, since I had a massive supply from bidding up other auctions. I was making on average about 2 gold a day, although that would spike to a 40 gold minimum during the weekend and Thurs/Fri as the raiders came on. This was back when the max level was 60 though, and a lot of people were still saving up the 90g for their mount well up to level 50.
The best part was there was no heavy lifting. Sure there were better ways to make gold, but all I had to do was collect cash from the mail, collect herbs/pots from the mail, possibly make some pots, and then post them.
After a while a bunch of people banded together and starting flooding the market with cheap potions. It wasn't feasible for me to buy them all, and everyone else would just snap them up. They were selling for close to, or less than, the cost of the phials to make them. So I just let all my auctions expire, banked my pots, waited for the market to crash - which it did, rather spectacularly, and then started posting again while the price was up and still climbing.
Mellisande Mar 15th 2010 5:19PM
Also, don't forget to factor in the time you spent farming those mats! For example, let's say that there are two items, X and Y. After an hour of farming you can sell all the X you "harvest" for 100g and all the Y you "harvest" for 200g. Even if what you really want is X, you'd be better off farming Y, selling it on the AH and then buying X. So many people don't grasp this concept that it's mind boggling.
idonotlikepeas Mar 15th 2010 7:53PM
Another important factor to keep in mind is that each auction is taxed. You can't just look at the price your materials are selling for and compare it to the price your final good is selling for and compute the difference in profit that way; you have to also take into account the amount you're going to spend on the auction house tax and the deposits.
The deposits are particularly relevant if the supply of ingredients is high and the supply of finished goods is low; you might be looking at an absolutely certain sale of a finished product compared to a less-than-100% probability of selling the materials, and any sale you don't make is a loss of the deposit.
Gothia Mar 16th 2010 3:52AM
This is the reason that it is so important to "know" when to switch from seller to buyer and once you grasp this concept everything else just falls into place.
Tim Mar 15th 2010 5:23PM
Ah, to be in econ again...hearing my Nigerian professor saying "What is opportunity cost?...NO!"
This situation for me is very clear in the mining economy. I need a spreadsheet to figure out how which is the most profitable. Titanium ore is selling like mad on my server, which means that you lose so much gold when you smelt it to bars. Which means miners only shouldn't make Titansteel bars.
Enter in an Alchemy friend or alt and it gets somewhat more complicated. 8 Saronite makes 1 titanium bar, which of course you cannot turn into ore. Which I made into titansteel for an armor set. It gets confusing when you add up the individual selling points for every piece of a recipe vs actually making the end product.
On my server the (8 Sar. Bar--->to 1 Titanium) x3 +Eternals (Shadow, earth, fire) = titansteel bar is mostly equal at every part.
Hollow Leviathan Mar 15th 2010 5:25PM
The name of the article is already an argument and proof of the concept of opportunity cost! We have goblins strategically placed all over Azeroth repeatedly telling people this very fact, that your time is not free: Time is money!
People are too used to saying things that mean nothing, they start to assume that what others say means nothing as well and stop listening.
Norrel Mar 15th 2010 5:27PM
It's not just about mats. Try explaining opportunity cost to someone who would keep a looted Battered Hilt, but would never pay 13k gold for it. They can't decide which is more valuable, the gold or the hilt.
kvanje Mar 15th 2010 5:41PM
To be fair, there are other factors in that scenario. For instance, a person who only has around 13k total may have no great need for an extra 13k gold, but would be inconvenienced by spending all his money on a hilt.
t0xic Mar 15th 2010 6:40PM
BOE Items depreciate the longer they exist. At first a hilt is worth a small fortune. Then it becomes more and more common as they drop and end up on the AH. If it was my drop I'd be at the AH faster than you can say "nice group".
Going into a new expansion I want as much liquidity as possible. Almost all of my assets have been converted to gold at this point. My many alts will need leveling gear, mats for professions, and multi-passenger submarines (or whatever they come up with). The choice would be so easy.
Great article, btw.
Cataca Mar 15th 2010 5:27PM
"I'll just buy their underpriced stuff and ask them to go farm more for me"
Wait, what? I don't think I'm understanding this example. Can somone elaborate a bit more using this example.
I mean, I think I get the over all idea...
Time spent farming = Time you could have spent making gold. Thus, farming isn't free, yes?
Cataca Mar 15th 2010 5:32PM
Oh and that turning a mats that could sell for 2g into an item that sells for 1g is, well, stupid.
serf Mar 15th 2010 5:59PM
"I'll just buy their underpriced stuff and ask them to go farm more for me"
It means essentially this:
Say some guy on the server spends an hour farming whatever it is that i need while I spend an hour doing what I know will yield the maximum amount of gold. Then, the farmer lists his stuff on the AH for less gold than i just made and I buy the stuff from the farmer with my gold and have some left over.
Because I have leftover gold at the end of the hour *as well as* an hour's worth of the mats I needed, it's cheaper for me to let the other guy farm my mats while I do something else.
monk Mar 15th 2010 6:22PM
@serf
well put.
nieboh Mar 15th 2010 5:32PM
I might have missed it, but do you also take into account the time spent in farming as part of the opportunity cost? Say I spend an hour flying around collecting 200 adder's tongue to make 100 potions of speed. If each stack of adder's tongue sells for 10g, then I could have sold the materials for 100g. If I used that hour running daily quests instead of farming, I could have made another 150g. So, is my opportunity cost 100g or 250g?
Alan Falcon Mar 15th 2010 5:43PM
Whatever you could have been doing instead that would net you the most amount of gold (in this case we're trying to maximize gold accumulation).
kvanje Mar 15th 2010 5:43PM
It's 150g: the highest paying alternative use of resources. You couldn't have both gotten the Adder's Tongue AND done the dailies.
Tim Mar 15th 2010 5:44PM
When you look at Oppurtunity Cost broadly it the cost of what you do in light of what you could have done. More specifically though it is always the most profitable choice compared to your actuall choice.
Saelorn Mar 15th 2010 5:52PM
Ideally, if daily quests provide more gold than anything else, then you should always run dailies first. The opportunity cost for making 150g from quests is the 100g you could have made from farming herbs. And if you have five eighties, then you must spend five hours farming dailies before you are allowed to do anything less efficient. Sounds kind of boring to me. (As it stands, you could not have both run dailies and sold the herbs, so your opportunity cost is only the greater of the two.)
Of course, you also must take into account that maybe sometimes the ore market is saturated and you CAN'T sell the twice-as-valuable ore but you CAN sell the less valuable bar. Any titanium you're holding onto when the expansion hits is essentially dead weight, after all. Likewise, by adding your ore to the market you are making that market more competitive and reducing the amount of money everyone gets from it.
That's not even taking into account that the Auction House doesn't actually MAKE money for anyone; it's a pure redistribution. If you could "make" 100g from selling your herbs, then you're actually just removing 10g from the system since the AH takes a cut, thereby increasing the effective power of what gold you have; if you make 150g by doing quests, then you're adding that much gold to the system, reducing the effective power of gold by a small amount.
It's complicated stuff.
Eyhk Mar 15th 2010 5:53PM
Unless you do your farming while doing dailies. Like Argent tournament dailies / Icecrown dailies along with farming lichbloom, icethorn, frost lotus, saronite ore, titanium ore. Cha-ching! But what am I talking about. Farming is boring. And so is doing the same dailies over and over again for the past year.