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Kirith Kodachi: PLEX Prices

July 21, 2014

Recently PLEX prices on the market have climbed through the roof and have gone over 800 million ISK per unit. The lowest sell prices in Jita today are at the 810 million point with the highest buy order at 803 million ISK. When faced with the decreased amount of player activity observed recently it seems rather counter-intuitive as one would expect there to be a correlating reduction in demand which should lead to lower prices, right?

Click for full size. Provided by @Sidrat2011, thanks!

Well, let’s do an Economics 101 class and see if we can’t make heads of tails of this a bit more.

Supply and Demand…

We are all probably well familiarized with the concept of supply and demand. In a perfectly competitive market with all other factors being ignored and the assumption that the sellers want the best price for their goods and the buyers want to pay as little as possible but neither side wants to wait very long (i.e. they do what it takes to sell / buy as quickly as possible), then supply and demand impact the price point at which a product will sell. As supply increases, the price will decrease and vice versa; as demand increases, price will increase and vice versa.

Example of demand increasing from D1 to D2 and therefore price increasing from P1 to P2 and quantity changing from Q1 to Q2.

The less well known part of that concept is that changes in supply and demand affect the quantity moved as well, so keep that in mind as I think it may come up later.

So as stated in the intro, since there are fewer people logged in there must be lower demand for PLEX and therefore shouldn’t the price decrease? Well, there may be fewer logged in players but there is no current knowledge that the number of subscriptions funded through PLEX has decreased the same amount; the volume of PLEX sold has decreased over the past few months but not as much as the PCU has fell, I’m guessing only about 10% from a glance.
Nevertheless, prices are rising and not decreasing! Something is a play here. Is it possible that demand has increased against our initial assumptions? Could the changed New Eden Store and ship paint jobs that require PLEX converted into Aurum to purchase be increasing demand? If this was true, we’d expect to see that quantity sold increasing or at least holding steady but that is not the case.
Perhaps the pressure is coming from the other side of the equation. As discussed above, when supply increases prices will decrease and quantity sold will increase, and when supply decreases then prices will increase and quantity sold will decrease. Interesting. 
Let’s do a scenario so see if my adhoc hypothesis holds up. Let’s say both demand and supply have fallen. The lower demand means prices will fall but the lower supply could counteract that fall, and even reverse it if the supply drops off enough. Note that we don’t have an easy graph to see how much the supply is at any given point, only the volume of goods sold and the price they sold at. On the other axis, if demand and supply both decrease then the quantity sold will decrease as well, which fits (albeit not as easily) with what we see.

TLDR: its possible based on my simplistic understanding of economics and the current state of the PLEX market that both demand and supply have fallen, leading to an increase in prices and decrease in overall volume.

If correct, and that’s a big if, we can postulate that if the concurrent users logged in numbers correlate positively with supply and demand, then PLEX prices could decrease if the PCU count recovers and climbs to higher levels again.
* * * * *
I was going to talk about Price Elasticity of Demand / Supply but I’m already feeling way out on a limb here. Basically from what I remember the idea is that the elasticity is a measure of how much a buyer will tolerate a changing price before they decide to not buy the product. A lot of factors plays into the elasticity like how much the item is needed, how much it costs compared to the buying power of the purchaser, etc. I’m going to wildly guess that the price elasticity of PLEX is pretty high, i.e. the price can increase quite a bit before a buyer will opt out of the market, hence why the volume sold has decreased so little in comparison to the price increases.
But that is even more of a wild guess than the rest of the post so take it with a grain of salt.

UPDATE: EVE Altoholic has better analysis with lots of graphs and expertise behind it. Go check it out!