Today we will be venturing into the field of Microeconomy! Opportunity cost is a concept that has been developed to make better economic decisions. As time is limited it is extremely important to focus your time on the best methods of gold making. We do not want to grind boars all night.
The New Oxford American Dictionary defines opportunity cost as: “the loss of potential gain from other alternatives when one alternative is chosen.”
We can tell from the definition that opportunity costs arise when you have two choose between mutually exclusive alternatives. The opportunity cost is the difference in “value” between the option you choose and the second best alternative.
Implied opportunity cost
Implied opportunity costs are costs that are not actual costs. An example of the notion of implied opportunity costs is a manufacturer has previously purchased 1000 tons of steel and the machinery to produce a widget. The implicit part of the opportunity cost of producing the widget is the revenue lost by not selling the steel and not renting out the machinery instead of using it for production.
Using opportunity cost for decision making in WoW
The main notion of opportunity cost in WoW is the question of whether you should sell materials or the finished craft.
“If I farm the materials myself they are free”
Some people would probably agree with the sentence above. It is obviously true that the materials did not cost you any gold. That does not mean that the most profitable use of them is to craft with them.
You need to compare the price you can sell the materials at too the price of the finished goods as well as their relative sell rates.
When you craft something with items you farmed you are foregoing the option to sell the items separately. If you are undercutting below the crafting cost for someone buying the materials on the AH you are undervaluing your time severely.
Time is money, friend
The concept can be easily summed up with the old adage above. Your time is valuable. You want to use it on the best opportunity for gold making. If you farm materials you need to find the best way to unload your items.
A very normal example here are people farming their own volatiles for Vial of the Sands. I buy all my materials at the Auction House, and I still make a good profit (5k-25k depending on prices). While the guy farming his own materials might be making more “profit” he is spending his time farming volatiles. Meanwhile I am scanning the AH for BoEs, re-posting auctions and crafting in other markets. This means my long term profit will be significantly higher!
What is the opportunity cost of an item?
So, what exactly is the opportunity cost. The easy answer is of course whatever price you can sell it at. The complication here is the fact that the price you can get depends on how uch you have of the item in question. If I have 100 000 Fjarnskaggl then it will take a really long time to sell it if I post at DBmarket. In general the opportunity cost is higher for items that are scarce or if you have few of them. You can easily sell 1000 Fjarnskaggl above DBmarket.
Opportunity cost is not an actual cost
It is important to note that opportunity cost is not an actual cost. It is a tool for making better decisions on what to spend time on. I do not use opportunity cost in any pricing formulas outside of always using the default crafting value in TSM for valuing materials. I use avgbuy in some operations. This is an approach that does not consider the opportunity costs as market prices might be very different from your purchase prices. For my actual auction house operations I only care that they generate a gold surplus. I generally try to be in ALL the markets anyway, so my implied opportunity costs are generally quite low.
An example: Blood of Sargeras
A very good example in Legion is valuing your Blood of Sargeras for crafting purposes. In general you can use your bloods for three things:
- Crafting items
- Trading in for materials at the vendor
- Trading in for order resources at the vendor
When deciding whether you want to craft a recipe that uses Blood of Sargeras you have to take both the other two uses into account. This evaluation will depend on several factors
- How fast you are acquiring Bloods
- What recipes you have access to that require bloods
- The price of tradeskill materials
- How much order resources you generate
Order hall missions can cost as little as 100 order resources (0.5 bloods) and give about 3k gold when maxed. If you have trouble generating resources the implied opportunity cost for any blood of sargeras recipe is extremely high and you should not craft it.
If on the other hand you only have one 110 and you are swimming in bloods and order resources the implied opportunity cost for any crafting recipe is just the value at the Blood Vendor.
The take away is to always consider the best alternative use of your materials and items. We want to generate as much gold as possible while minimizing our effort and time spent. Considering opportunity costs is an invaluable decision making tool to help you spend more time on the stuff you enjoy!