Supply & Demand Explained

Posted by Shockkmaister at 8:00 AM

First of all I'd like to say hello to everyone, I go by the name of Shockkmaister and I'm one of the new writers here, at JMTC. Let's get down to business.

The basics
It is generally well-known that prices of commodities are determined by something called supply and demand. However not everyone knows what it is or exactly how it works. Today we shed some light on this concept.
Supply is the amount of a given commodity people are willing to sell in an economy. Demand is the amount that people want to buy. At a fixed demand the higher the supply is the lower the price is and vice versa. This is because more supply means more product that one needs to match or undercut in price in order to sell. To serve with a simple example let's say there are two traders at the market who are selling apples. Over the years they both settled at the same price. If a third trader is to get in the business of selling apples at the market, he would most likely undercut that price in order to start his business. Then most likely the other traders would match the new price, lower then the original. Also, if no new player shows on the market but one of the original traders would get an extra amount of apples, then he would lower the price because he needs to sell more apples. This means that supply is inversely proportinal to price. On the other hand demand is proportional to it. The less apples people want to buy the lower the prices will be, because sellers want to encourage people to buy more, as they need to sell more. If people suddenly want to buy more apples, then traders would realize they can raise the prices and still sell the same amount, with higher profit.


That's nice, but where is my money?
Let's see how one can make a profit by understanding this concept. There are two ways:

• Buy your stocks when you know supply is high. Depending on what professions you have, you will need a certain amount of raw materials every time you craft. That doesn't mean you have to buy it at that time. For example I have every profession at 525, and I craft once every week, but I check the AH daily, and buy the materials over the week. Also by thinking ahead I can buy materials for weeks ahead.
• Speculate. If you know that the demand of a commodity will rise, stock up on it, to resell later. For example, some people are stockpiling pyrite ore for the next patch, because there is a good chance epic gems will be available by prospecting pyrite. Also if you know that supply will rise, you can try selling short. Selling short means to sell products that you don't actually have at the time of the transaction, but will acquire later. In real life this usually means that the seller borrows the product from a third party, but in WoW it's hard to find someone willing to actually borrow you stuff. What you can do is dry up your own stocks. For example I usually have 2 thousand pieces of every volatile stocked except life, which I have 3k of. Every time I use volatiles I restock them as soon as I can (when the price is good). This allows me to do my weekly crafting without having to look for materials. However I know that when and if epic gems will be prospected from pyrite, the supply of volatile earth will skyrocket, so 2-3 weeks before the patch I'm going to let my stocks dry out, and restock after. This means that I'm actually short selling volatile earth by borrowing it from myself.

Now that we know how good speculating can make us big bucks, let's see how to speculate with supply and demand. There is probably a million different way, and I doubt anyone knows them all, but here are some of the bests:

• Monitor the farmers on your realm. Again, to serve with an example, on my realm there are three major herb farmers. I keep in touch with them. When I heard that two of them are going on vacation at the same time, I started stocking up on herbs. After they were gone, whiptail rose from 30-35 per stack to 40-45 per stack. By that time I had 6k blackfallow ink and around 1k inferno ink in my guild bank, so I didn't have to by any more whiptail.
• Always read patch notes as soon as they come out. For example they can contain a new use to an existing product which would make the demand rise (transmogrifying...)
• Know your competition. For example if you are trying to sell vial of the sands, and you know who else has the recipe on your realm, there's a good chance that if they even want to make vials for gold, they will most likely have one every 12 days, as it needs 12 truegolds, which has a daily cooldown. Sell yours when they're out.