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The Law of Supply and Demand

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  • The Law of Supply and Demand

    The Law of Supply and Demand

    Ultima Online is an example of a closed virtual market economy. For a market economy to function, Crafter/Vendors must supply the goods that players want. This is known as the law of supply and demand. “Supply” refers to the amount of goods a market can produce, while “demand” refers to the amount of goods players are willing to buy. Together, these two powerful market forces form the main principle that underlies all economic theory.

    The law of supply and demand explains how prices are set for the sale of goods. The process starts with players demanding goods. When demand is high, Crafter/Vendors can charge high prices for goods. The promise of earning large profits from high prices inspires Crafter/Vendors to manufacture goods to meet the demand. However, the law of demand states that if prices are too high, only a few players will purchase the goods and demand will go unmet. To fully meet demand, Crafter/Vendors must charge a price that will result in the required amount of sales while still generating profits for themselves.

    For example, assume that a Master Blacksmith perceives demand for an exceptionally crafted sword. The Blacksmith invests in market research to produce the exact type of sword the players want. The blacksmith then produces 500 swords and puts them up for sale at 1000 gold each. Consumers who find the phone to be valuable pay the full 1000 gold, and half of the swords are soon sold.

    Because of the high price, however, sales gradually begin to drop off. Many players still want the sword, but are unwilling or unable to pay 1000 gold for one. Because the Blacksmith loses money on unsold products, he reduces the sword’s price to 500 gold in hopes of increasing sales. Players begin buying again. The process continues until a price is reached that will both meet demand and maximize the blacksmith’s profits. That price is known as the “market-clearing price.”

    When supply becomes balanced with demand, the market is said to have reached equilibrium. At equilibrium, resources are used at their maximum efficiency. The study of economics is largely a study in how market economies can best achieve equilibrium, which is why economists spend a great deal of time analyzing the relationship between supply and demand.

    The law of supply and demand explains why people behave in certain ways within a market economy, and can even be used to predict behavior and, thereby, economic outcomes.

    UO Evolution takes this theory and applies it before making any changes to our economy.
    UO Evolution "The Game Has Evolved"