Goblin Mindset: Using marginal cost considerations to improve decision making

Today I’m going to take another look at some more concepts from microeconomics. I have covered the idea of opportunity costs and sunk costs before. Today I’ll look at marginal costs. 

Unit costs

Marginal cost is a concept related to describing the production costs for a company or a similar entity. It is specifically related to the cost for producing a single unit of something.

The point of focusing on the cost of creating a single unit is of course to decide whether you want to produce more of a specific item. In WoW terms you would use this to decide whether or not to buy more materials and use them to craft a specific item. 

Marginal cost

Marginal cost is the cost of creating one extra item. This will generally increase the more items you want to craft, as there is a limited quantity of cheap items available. 

The more materials you want to use, the higher the average price per material. Thus your marginal cost will be increasing for every extra item you create. 

Profit margin and marginal cost

You can consider marginal costs in several different ways. You want to make sure that your average cost is lower than you average price by atleast 10%. This will ensure a good long term profit. 

This means you may be willing to take margins as low as 5% on some of your sales. 

120% crafting

120% crafting is the minimum price in all my crafting based operations. The crafting source is by default based on the dbmarket of the materials. 

Using these concepts together you can now make some more intelligent choices when buying materials. You’d be willing to have a marginal cost based on 110-115% dbmarket for the materials as this would still guarantee a profit for your most expensive crafts. Typically you will buy materials from 60%dbmarket to 110%. As long as your average buy price is dbmarket or lower you will be generating the profit you expect!

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