Fungibility and Opportunity Cost (old)

Fungibility is the property of a good or a commodity whose individual units are capable of mutual substitution. It refers only to the equivalence of each unit of a commodity with other units of the same commodity. Basically, Gevlon's idea that your herbs from farming are identical to herbs purchased from the AH and should be treated as if you had, in fact, purchased them from the AH in terms of appraising their value. 

Opportunity cost is the value of the next-best choice available to someone who has picked between several mutually exclusive choices. In WoW terms, you can only use your time in WoW for one activity at a time. If you run instances, the opportunity cost is the amount of gold you would have made running dailies, farming, or playing the AH. If you chose to farm instead, the opportunity cost would be the emblems you would have made running heroics. It's basically the concept that to do one thing, you must choose not to do something else. So where am I going with this? I thought of it when I saw the comment about how heroics are good money. It's true to an extent, 500g is 500g no matter how you got it. However, it's ignoring a very important concept to someone who wants to make a good sum of gold: Time. Time is money is true in wow. In any gold generating activity you perform, you are trading time for money. Dailies and Farming are pretty obvious time for money trades. People who play the AH like to pretend they're trading money for money, but there is still time spent scanning the AH, processing products, studying markets, and so on. What they're actually doing is leveraging money to greatly increase the ratio of gold they acquire for their time spent. I use two measures of wealth: gold per day and gold per hour. Gold per Day is a measure of the success of all of your given gold generating activities in a given day, ignoring the amount of time you spent performing them during the day. Gold per Hour is a measure of how quickly an activity will generate gold. A useful analogy is Gold per Day would be like distance travelled during a day and gold per hour is the velocity in which you travelled that distance. Someone who made 500g in a day might have spent 10 hours making 50g / hour or 1 hour making 500g. Given the choice, you obviously want to do the latter. The reasoning for this is simple. It frees you up to do other things with your time that aren't directly generating gold. Alternately, you can use that free time generated by higher gold per hour and use it to acquire *even more gold.* You'll find as you start acquiring more money, that time is the limiting factor and in order to increase gold, you need to increase your rate. Gold per hour is primarily useful for assessing the opportunity cost of a given action. In other words, to provide a basis of comparison for gold making activities. Dailies can be as high as 320 g/hr. Let's say you can do 1 hour per day of dailies. Farming can vary. For the sake of argument, I'll assign it an arbitrary value of 200g/hr. Let's say you make 250g/hr playing the auction house. You can do this for 2 hours. If your only activity for making gold in a day is farming, your opportunity cost is the gold you would have made from dailies or playing the AH. In this case, the opportunity cost for farming would be 120g for the first hour of farming, then 50g/hr for the next 2 hours. Total, you've lost 220g. Basically, you should prioritize the higher g/hr activities--choosing the lower ones is the same as losing gold. I was wondering how good the Heroic gold was so I sat down and did some napkin math. An emblem of triumph is worth roughly 17g. (10 = 1 epic gem, valued 170g). I estimate many heroics give 5 emblems and 13g for 20 minutes of work. You can run 3 heroics in an hour, so the gold per hour value of heroics is 3*[(17*5)+13] That is to say, 294 g/hr. In other words, it's a pretty lucrative activity! It's nearly on par with Crusader argent tourney dailies, and it's not counting any DE mats / loot you get while running them. Of course, no one really runs heroics with the intent of acquiring gems, but the emblems are worth 17g per all the same. Yes, that means your t9 chest basically cost you 850g.

My AH Method (old)

There are two methods of profiting from other players using the AH. Business profit and work profit. Business Profit involves taking advantage of mistakes other people make. It's essentially what drives the buy low/sell high mechanic--person A posts for below the market price, you buy that and repost above market price. Person B buys your overpriced repost. If the market price of item X is 10g, you bought at 5g, and sold at 15g: you made 10g business profit. Work Profit involves providing a service generally inaccessible or inconvenient to other players. They're willing to pay a premium because it saves them time. The person trades his gold for your time--the method works because as the producer, your time spent can be much more efficiently spent producing items in bulk compared to finding someone to craft a single item at a time. This is the aspect I focus on. Let's take Sapphire Spellthread as an example. It's a leg armor kit produced by tailoring. Its materials are 4 Eternal Fires, 4 Iceweb Spider Silks, and 1 Frozen Orb. The first thing I do is calculate a material cost. This is based on the MAXIMUM value I'm willing to pay for the raw reagents. In this case, my snatch list has Eternal Fire at 25g, Iceweb Spider Silk at 5g, and Frozen Orbs at 20g. So my material cost is (25*4)+(5*4)+20 = 140g. The next thing I do is decide the minimum amount of profit I'm willing to accept for creating this item. This is essentially the price I'm setting on the time it took to find and buy the items, craft it, and repost it until sale. You can make profits even setting the price 5g over mats, but that's a terrible price to put on your time for this item. Let's say I want 30g profit. This means the minimum post price for me will be 140g (mats) +30g (profit) = 170g. I actually factor in the AH cut (5%) and 1 deposit fee when I consider profits, but that's not necessary to describe the concept. So I set my snatch list to buy those mats for the max I'm willing to pay, then I set quick auctions with a threshhold price of 170g. This means I'm guaranteed 30g profit every time one of these sells. Now Quick Auctions also has a fallback price, a price you won't post above. You can set it as high as you'd like, but I'd consider a reasonable price so it will move even if no one else posts. I set it at 215g. Best case scenario, I'll make 215-140=75g profit on this transaction. What if the mats are cheaper than my max buy cost? Then I consider the difference to be business profit. I bought the items at a discount, then "sold them to myself" immediately, pocketing the difference. This is important because the price of mats varies widely across time, and in your inventory, you might have X Fires purchased at 10g per, Y Fires Purchased at 15g per, and Z Fires purchased at 25g per. Unless you're an extraordinary recordkeeper, there's no way of distinguishing them and you'll lose money if you set your profit margin according to the 15g fires and end up using the 25g fires. This method very crudely responds to the market situation. If mats are plentiful, many people see there is profit to be made on the item and craft it, then prices drop as they undercut one another. Your profits will drop toward your minimum profit per transaction, but you'll make it up in volume. When mats are sparse, the price of mats rises and people can't afford to invest the money to craft the items, so there's less competition with similar demand--your prices will rise to your fallback value. You sell less, but make more gold per transaction. If you watch the market like a hawk, you can be much more efficient about responding to changes. I prefer this method because I dabble in so many markets, so keeping up on all of them is difficult and this is pretty much dumbfire. But, what if people are stupid and post for less than cost of mats / ridiculously low profit margins? That's what the threshhold (will not post below) is for. Don't bother buying them out unless it's near or below your material cost--it will just encourage them to craft more and there may not be enough demand to move your product and theirs. Instead, just let them sell themselves out. You won't post any product during this time thanks to QA2, but conversely, you don't have to do any work--you're not moving product, therefore you're not obliged to craft more. Because this happens a LOT, I make up for it by diversifying into different markets. Some markets will tank temporarily when stupids infest it, and I don't spend time on those until they leave. Meanwhile, other markets will be profitable and I'll work in those. It's more or less a "pull" system where you restock products as they sell, and therefore concentrate your work on what's actually moving. This also means at any given time, you end up with a significant portion of your wealth as product. Because mat prices go in cycles (Iceweb goes from 4-15g per, for example) I tend to buy as much as I can in low points and use that to ride out high points. Part of the reason I don't do much "buy low, sell high" is because I have little skill with it. The other part is I end up selling most of those buy low items to myself and passing that item through production to make further profit through work. I use an excel spreadsheet to calculate profits. You can do it by hand, but the problem is sometimes the market changes. When that happens, I can just enter the new value of mats to see if I can buy higher and it will automatically calculate my new profit margin. You need to adjust your prices as the market shifts. Raising and lowering the snatch value influences how much raw material you can acquire. Higher values get you more material at the cost of profit. Altering the threshhold price influences how often you will post your product. Lower means you post more, means you make more sales, but again, at the cost of profit. This is the part where knowing the market helps--you can tweak it in response to supply and demand of both materials and product