I'm gonna divide this up into 6 parts. Supply, Demand, Equilibrium, Undercutting , Gil Sellers and Q&A. In those sections I will explain why those who understand economics undercut and still make profit and why gil selling will never go away.
If some of you see this as a 'dead horse', I'm sorry. I'll try to throw some unique concepts in there.
First, the basics. Please bear with me, I'm gonna try and cram a full year of basic economics into a single post.
Let me first establish that a Monopoly system will not be factored into any of my explanations for the ease of simplicity. Yes, I know it happens, but if you really want to see the impact of it on Supply, Demand and Equilibrium I suggest you enroll in a economics class at your local university.
Since I can't post images inline, links to images of graphs will have to do.
Law of Supply
Without defining the law of supply, it is basically a upward sloping curve with price on the vertical axis and quantity on the horizontal axis. A higher price for an item results in more people willing to supply the item. A lower price results in fewer suppliers.
http://robyngreen.com/ffxi/supply.gif
The best way to think of supply is the NPC price of any given object. For example, if rabbit hides begin selling for $2,500 gil to NPC, would everyone agree that the amount being farmed would increase? Likewise if the NPC and AH price of rabbit hides was under 3 gil, the amount being farmed would probably decrease. This is the basic law of supply. As the price per item increases, the more people are willing to supply said item.
IMPORTANT: Demand was NOT factored into the above equation.
Law of Demand
Again, without defining the law of demand, it is basically a downward sloping curve with price on the vertical axis and quantity on the horizontal axis. The higher the price of an item, the less of a demand there is for it. The lower the price, more demand.
http://robyngreen.com/ffxi/demand.gif
The best way to think of this concept is the price of any rare drop. Let's use the Emperor's Hairpin for example.
DO NOT think about supply when visualizing this example. We are not talking about supply here, only demand.
If the current market price for the Hairpin is $500,000, the demand for this item is going to be relatively low (higher price, less demand.) However if the price was instead $15,000, demand would be greater (lower price == greater demand, more people want it.)
Equilibrium
Ah, now starts the fun stuff and a few 'ah-ha!'s from our crowd I hope.
What happens when you factor both Supply and Demand into an equation? Well my friends, you get what we call Equilibrium.
http://robyngreen.com/ffxi/equi.gif
An important note, all Market Economies will fall into an Equilibrium at some point. It is my understanding from playing this game for almost a year now that FFXI has a Market Economy, although it has a few loose ends here and there.
This is where we get the current market price and we also get to play with Supply and Demand.
Let's go back to our Demand example, the good 'ol Emperor's Hairpin. You remember the demand curve for that example, right? Well guess what happens when we add Supply into that.
http://robyngreen.com/ffxi/equil2.gif
Wow, look at that. We've got the current Market Price (or recent history at AH) for the Emperor's Hairpin. Five will sell at $380,000. Fascinating isn't it? I think so.
But wait! Look, we've got a bevy of Thiefs and Rangers approaching lvl 24! Oh my, what's going to happen to Equilibrium if just Demand (D2) is increased?!
http://robyngreen.com/ffxi/equil3.gif
Well look at that. If demand increased without an increase in supply, the price goes up. Hmm, looks like those of you who want that Hairpin are somewhat responsible for the increase in price, wouldn't you agree?
Now those Thief's and Rangers are buying the hairpin and quite a few people have noticed the jump in price as well, so they start hunting down that wily Emperor himself. As a result, supply (S2) is increasing but demand (D2) is staying flat.
http://robyngreen.com/ffxi/equi4.gif
See how the price goes down? It's not undercutting, it's the economy shifting into Equilibrium.
If this is still kinda fuzzy to some of you, draw out these graphs on a sheet of paper and play with the curves remembering this - an increase in Supply or Demand shifts the line to the right, while a decrease shifts it to the left.
This leads into my next topic ...
Undercutting
Having seen Supply and Demand interacting with each other, it should be clear now that those who play this game and have some grasp on the concept of S&D will undercut when necessary.
Some of you may not like this statement, but I'm sorry. It's just the way economies work.
If you go to sell your stack of beehive chips and there are 75 on the market when you place yours, if you do not feel like the demand for this item will increase, you will undercut to sell your item. Plain and simple.
Why? Well, the supply has obviously increased and - as we all know from our Equilibrium example above - if demand does not increase to match it, the price WILL fall. No if, ands or buts about it.
I know what you're thinking. "Well, if no one undercuts, then the price will never go down and I'll make more gilzzzz you l4m0rz, so stop undercutting". I'll respond to this in the Q&A section.
Subsequently, you can also make gil by recognizing this. Same example as above, but let's say that there are only 3 stacks of beehive chips for sale. Understanding S&D, alarms should be going off in your head saying "Hey, I know demand for beehive chips is pretty high being a low-level synth. Supply has shifted backwards, so therefore the Equilibrium price is higher. I should sell mine for a bit more than the last selling prices because I know the demand is there for them."
You should also recognize that there are two players when it comes to setting the current price. Suppliers and those who demand the item.
If the price is falling, why not blame the crafters who no longer demand that object as well as the 'l4me' under cutters?
I'll tell you why - because it's just as ridiculous sounding but for some reason it's easier to see and blame the suppliers.
Gil Sellers
"WTF, why is he putting Gil Sellers in with an Economics lesson," some of you might be thinking. Well, the answer is simple. I've seen a few posts here on how to control gil sellers, what can be done about them and are they ever going to go away.
Using economics, you can understand gil sellers better and what the best course of action is to bottom-out their market.
How? Well, gil-selling also has a Supply and Demand graph with supply and demand curves that are very responsive to players.
Are the ideas still not going off? Ok, let me explain it a bit more in detail.
What would happen to the price of gil if the supply was to suddenly increase without a demand? That's right, it would fall.
I think we're past this point with gil sellers. The gil selling market has settled into it's equilibrium and as long as demand does not keep increasing, it will stay around this area for a while.
Did you catch it? Ok, here it is. Forget trying to disrupt the economics of gil selling by only focusing on the supply graph (i.e., killing gil sellers, taking their mobs, etc). As it is right now, there's enough demand for it that they'll just find another way to make gil to sell.
There's another factor to the equation that just as directly relates the number of gil sellers and is perhaps easier to control.
That's right, demand. If demand for purchased gil was to fall, the amount of gil supplied (i.e., number of gil farmers) would have to decrease to keep their market alive. If the supply side isn't responsive to the demand, the market will bottom out. Less demand results in a cutback in the amount supplied.
So talk to your friends, LS mates and party members. Try to explain to them that, if they buy gil and they see it as a victim-less crime, how it directly affects a larger number of people.
Try to control that demand side of gil selling, not the supply. If the demand is high enough, gil sellers will always find a way to supply the gil, no matter what you do to stop them.
Q and A
There's actually two parts to the answer. The first one is, well by not undercutting when supply has exceeded demand you are basically spitting in the face of hundreds of years worth of economic principles. It's very hard to control the market in this way.
The other answer is that this is real life and that simply can not be done. Are you going to /tell ~70 people "OMGWTFBBQ st0p undercuts muh gilz! Only sell fo' dis price, n00b" and have them all go "Gee sir, I was simply factoring in Supply and Demand when I set my AH price, but your plight for more gil has made me realize the errors of my way. From now on, I will always sell my items for the current AH price, no matter if there's 3 on there for sale or 3,000. Thank you very much sir".
No, I don't think so. You can't realistically expect to control the selling price of every item on the server, so just relax and play the market game. I promise you, you'll come out ahead.
Absolutely not. There are flaws (monopolies on certain items, 'inexperienced' people selling items, etc.) But overall, the economy of FFXI does adhere to the rules of Supply and Demand. Now I know some people do undercut prices unnecessarily, but if you truly understand Equilibrium, you'll see how the market will suffer a temporary setback (i.e., don't sell your item just yet), but will always bounce back to Equilibrium if neither Demand or Supply has shifted.
While I think this may be about %20 true (thanks to some people fully admitting this), it really has nothing to do with the market price. Not all under cutters just want faster gil, they simply understand the market.
Those people who want faster gil may provide a few bumps in the Equilibrium price in the short run, but this isn't something new. It happens in all economies. Just hold your items and wait for the market to adjust itself.
And no, if the demand for an item is truly there and the price is not artificially inflated to begin with, there will be no domino effect with the price as a result of a couple people shortsightedly undercutting.
This concludes my basic lesson in economics. Thanks for reading it to the end, I know it's been long. I hope I've made clear, concise points. In some instances, I hope I've offended some people.
Now that many of you are more educated in the ways of economics now, go out unto the world and make more gil!
Edited, Sat Oct 30 13:16:41 2004 by Whales