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Tuesday, March 8, 2011

Opportunity Cost and Farming - A Listener Question

Auction House Junkies Questions

Over at Auction House Junkies (The Cold's Gold Factory + Capped By Cata Joint Gold Making Podcast) we get a ton of great questions.  Some of the question are discussed live on the show by Wes and I, but others never make it live.  We have agreed to pull from these questions and answer them on our blogs.  General thinking is that if one person is asking about it, there are probably multiple others wondering the same thing.  If you questions doesn't happen to make it live on the show, be sure to watch both Cold's Gold Factory as well as Capped By Cata because your question may be answered on our blogs.  So here is the first AHJ submitted question I be will tackling here on my blog.

Hey guys,

How can I determine the value of my time in terms of gold when I usually farm my own crafting mats? I've read on blogs and heard on podcasts that many think that if they farm their own mats these mats are essentially free and have no cost associated with them. Since the time spent gathering these mats is worth something, how do I calculate that worth?

Keep up the good work and keep the podcasts coming.

Opportunity Cost
When I read this question I immediately think of the principle of opportunity cost.  Tali you are correct when you state that some players who farm or gather their own materials consider these items "free".  Opportunity cost comes in when creating items or selling products that contain these "free" farmed materials.  Some players will undercut auctions down to a low price that results in a completed product that sells for less than the sum of its parts.  Let's look at an example.
Crafted Item 1 is selling on the auction house for 200 gold
Crafted Item 1 requires:
10 of Material A, 1 of Material B, and 1 of Material C
Material A sells for 10 gold on the AH
Material B sells for 25 gold on the AH
Material C sells for 25 gold on the AH
So together it costs a player buying all of the materials off the Auction House 150 gold to craft it, which leaves a 50 gold profit minus AH listing and sales fees. 
(10x10) + 25 +25 = 150
200 sale - 150 cost = 50 gold profit
Now undercutting ensues on the auction house as there is now competition for the sales of Crafted Item 1.
The costs of Crafted Item 1 is now down to 160 gold.  In an attempt to get the sales by deep undercutting a foolish player may now list these items as 120 gold in order to steal all the sales away from the other sellers of Crafted Item 1.  They think this is a good idea, because they farmed the Material A themselves.  Their false logic tells them that they paid nothing for Material A and 50g total for Material B and Material C so listing at 120 gold is still a nice profit since they only spent 50 gold to make that 120 gold.
This is completely wrong.  Why?  Because they would have made more money selling the materials instead of using them to craft.  They could have sold 10 Material A for 10 gold each for a total of 100 gold pure profit from selling the Materials.
You never want to craft something if the value of the crafted item is less than the sum of the materials.  A current example:  If Darkmoon Faire cards are selling for 1000 gold each, then you better be getting over 8000 gold for your completed deck or trinket.  You wouldn't want to buy 8 Darkmoon Faire cards valued at 1000 gold each that combine to make a 5000 gold deck, would you?  You'd make more money selling the individuals.  Same applies to raw materials.
The real problem is when the players with this "I farmed it so it's free" mentality start to drive prices under material cost for the market as a whole.  That really gets your competition upset. 
Tali, as far as what value to place on farmed items, that's just usually determined by market value.  If the market value is not what you would like to get for your farmed items, then don't post.  Wait until the market value goes up (like selling during the week instead of the weekend) or find a more profitable use for your farmed materials.  A good example would be a miner who farmed thorium ore.  Your market value for thorium ore is probably not as valuable as the market for arcanite bars, which are crafted rather cheaply on most servers due to low priced arcane crystals.  Look for a higher profit use for your materials than just selling them raw, if that raw price is below what your expect to be compensated.
Anyone else care to weigh in on the topic?

Continue on to Opportunity Cost Part 2.


  1. yeah it drives me crazy, because of all things I can craft with alchemy, except the xmutes, only 1 flask and 3 pots can be sold with a profit if you are buying mats from the AH on my server.

  2. To determine the value of your time you need to know some simple and stable ways to make gold. Some of the most common ways are farming mats, doing dailies, prospecting, et cetera. This is all going to depend on what proffessions you have and what your server's economy is, so it's going to be different for everyone.
    Doing dailies is probably the most basic way, so let's say you can make a steady 1000g/hour questing (just as an example, I haven't done dailies for gold since Wrath). You can look at this rate as your minimum wage. Now if you want to craft something you should be able to gather more than 1000g worth of mats in an hour, otherwise you'd be better off questing and then buying the mats.
    I guess my point is that the value of your time is an individual thing, and will require a bit of experimenting to determine. I'd say not to waste too much time figuring this, but it's good to have a generall idea so you can make good decisions on how to spend your time.

  3. I just ran into this on Frostweave cloth. Leveling a tailor thru Northrend, ending up with piles of Frostweave. My normal routine is making bags and selling them, as bags tend to always be a hot item. Frostweave bags are selling on my server at $130+ each, up from $60 in the past. So, I took all my cloth (around 100) and Infinite Dust, made Bolts of Frostweave... turning that much product into 2 bags. Which sold almost immediately for $135... Thinking I was on to some profit, I checked the price on the cloth, and except for a few stray peices, it was selling for 70g a stack! So, $140g would get me 4 bolts of Imbued cloth (Bags take 6) and not counting the dust cost, I just cost myself about 100g had I just sold the cloth/dust seperate! AAARGH!

  4. A failed thought process I have seen too in inscription... "I milled 'herbs' and got inferno ink that I sold for the price of 'herbs'. So I traded the blackfallow ink down beacause it was paid for..." Blackfallow is always worth 1/10 the value of inferno... so if inferno ink is 100G, blackfallow is worth 10G. that means that to be maximizing your profits, you should not trade down in this scenario unless the ink you are trading down to comes from herbs that are more than about 40-50G/stack. Yeah, dont nuke the math, here not providing exact and empirical data, just a simple concept. For best result you need addons and/or a spreadsheet to get data faster to move with the markets. Just saying that most markets... that is probably only the case for a some ink/herb categories... and trading down blackfallow to other inks is easily a loss on income potential, or opportunity.

    simply put. Simple numbers.
    Example one:
    Inferno ink on AH SELLS for 50G
    Blackfallow value is 5G
    Average return on other herbs 5 inks per stack
    trade down if purchace price for herbs is over 25G per stack (5G x 5 inks)

    Example two:
    Inferno ink on AH SELLS for 125G
    Blackfallow value is 12.5G
    Average return on other herbs still 5 inks per stack
    trade down if purchace price for herbs is over 62.5G per stack (12.5G x 5inks)

    Notice the inferno ink "SELLS FOR" is caps.. you have to know what it will sell for and a the undermine journal can help you here...

    Numbers are all conservative and to make sure you make a better profit in these examples. It does not account for the higher producing herbs, and it does not count for what you can get out of the other rare inks from non cata herbs.

    Having spent 4 months in semi serious AH game in various markets, and gone from level one new roll, new server w/ nothing to 415k in under 3 months, and back down to 50 and almost back to 400... secrets...
    ---Patience, never be in to big a hurry to sell, but dont wait too long. (more than a day or 2 but less than 2 weeks)
    ---Persistence, when it seems you may not have a profitable market, you probably don't, not right now but go back to rule one and watch it over the next 2 weeks and beyond
    ---Do things others dont want to. I made a ton of my gold on the "mill herbs" the majority of it really. people dont want to spend and hour a day milling herbs. they get bored in 3 minutes... THAT is HUGE... that is why inscription and JC can make bank... you have to break ToS or click... click... click... clickl... click... click.... ... ... ... .. 10 minutes later your excitment is going aft while you create all inks, then empty your bags to storage, take more herbs in this case out of storage, click... click... click rinse and reapeat... the 400K mark in about 3 months that will raise some eyebrows I expect, was 1-2 hours or more a day milling herbs and making inks. for about 6 weeks and taking advantage of the expansion, the difficulty of heroics and raids and getting gear etc.
    ---Be able to adapt and change to markets.
    prices dont ever stay the same... know how much it costs, decide how much your time is worth and go from there.

  5. Actually none of you answered the true question: What is my time worth? Which is easilyu answered as follows:
    Take 1 hour faming any material you like. Take those materials to the Ah and sell them.
    Your answer is found by dividing your earnings by 60 min (this gives you your earning per minute).

    (FOR EXAMPLE: You spend 60min farming 60 Frostweave cloth. You place the 60 cloth on sale for the going price of 70g per stack (3 stacks at 70g per). They all sell so you earned 210g. Divided by 60 is your time (farming Frostweave) was worth 3.5g per minute.

  6. My vote goes to Anonymous #2:

    You need to figure the value of your time. To start with, forget calculations of farming vs. selling mats vs. crafting.

    Your opportunity cost is what you could be making if you were doing the most profitable thing you can do (under the assumption you can do as much of it as you want).

    (In reality, you need a handful of things to do due to diminishing returns)

    Once you have identified these reliable ways of making money, you should know more or less how much they make you - on the basis of time.

    For instance, I make perhaps 50 higher price glyphs once or twice a week, buy out cheap glyphs for (eventual) relisting or to prop up glyphs prices, craft and sell i346 JC items, sell expensive bags (meh to Netherweave), and do some other JC work - those mainstays probably pay out 2,500-4,000g per hour of work. That's 40-70g per minute. That's my opportunity cost.

    These days, simple farming pays 1,500g or more. If what you're doing isn't generating 1,000g per hour, and making money is your objective, you shouldn't be doing it.

  7. true to all, but its all in perspective. i would often rather go kill mobs... farming them for ingredient x because it breaks up the routine and the time/money factor is not a complete waste... I am talking about rare mats that are rare on the AH and quite valuable, but still easily farmed up for good profits when crafted and sold. Not saying "i farmed it, so its free!!!" you want to put a gold value on my time.. hard to do.. unless you were to meticulously track a lot of number and run in some pretty controlled environments.. then qualify the conditions to boot... "I do dailys for gold and make 450gold/per hour" is that just from quest rewards? or did you count greys? and cloth? and EPIX for 55gold vs. 15K gold for reptation? well that changes things...

    I try hard not do do stupid stuff much of the time and for that attitude i have a lot more gold than most. but i only gage my time at how much fun i am having... at this point i am goaling to get to one million and almost half way there... because when i want to raid i dont want to have to do daily to have the gold to get the gems/chant/food/flasks/pots etc... new upgrade gets new gems and chants out of the AH.... not trade... why.. because by my preferance and MY interpretation of the oportunity cost is 20 minutes to an hour in trade windows and trade chat is poorly spent... people are often broke and looking for a deal because the apparently would rather spend the time trying to save their way to a fortune rather go out and work for it... by spending 3-5 minutes in the AH, i have my pots, flask, gems, chants etc for my next raid and on my new gear ready to go... and now i have 20 minutes too go do something that could make me 500-1000 gold in the remainder of that 20+ minutes. most of the time i will go level an alt, therby creating another oportunity group with new professions...... and i LIKE leveling alts...

    oportunity is not so easily measured


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