Market Discussions

Your friend is, indeed, wrong.

If you mine 6 million isk worth of minerals in an hour, you have increased your net worth by 6 million isk.

If you buy 6 million isk worth of minerals, your net worth remains static.

Now, the opportunity cost is down to what you'd do in that hour, if you were not mining. Sure, you could probably do something else, which would net you more isk. But it's not just time that's important. It's attention spent. Mining is a low attention activity. So, missions vs mining, you might have spent the same attention, for the same increase in net worth.


(The value of the minerals is set by the market. But I suspect you already know this There's just a common fallacy that 'the minerals I mine are free!' which leads to people undervaluing their assets, to make more 'profit' from manufacturing)

Correct, you have just summed it up all, sir. :)

Okay, so lets look at this. Opportunity cost says the following using your numbers:

You can mine and get 6 million ISK of minerals.

You can mission and make 10 million ISK.

The opportunity cost of mining over missioning is 4 million ISK. So, your profit calculus should be as follows:

8,000,000 - 6,000,000 - 4,000,000 = -2,000,000.

The minerals have a market value of 6,000,000 and as such are now a cost...even if you mine those minerals yourself. That you passed up the 4,000,000 net benefit from running missions instead means you lose out on the 4,000,000.

Now! And this is the important part. Your wallet WILL NOT reflect the -2,000,000. Accounting costs and economic costs are NOT the same thing. Accountants do not factor in opportunity costs. Mainly because opportunity costs may not be directly observable. Opportunity costs can be dependent on the person. For example, I hate missions. So even , though I could make 10,000,000 ISK it is simply not worth it to me to spend my free time that way.

Further, the idea that there is no opportunity cost means that by destroying property we can promote economic activity. After all, if I bulldoze your house...you'll have to build a new one. You shouldn't be mad I bulldozed your house, you should be happy! More economic activity. When a country goes into recession it should bomb itself to promote economic growth. Basically you are subscribing to the broken window fallacy.

NO!



Stahp, just stahp, my baby boy... Shhhhhh...

Missions:
(10mill - 6mill) + 2mill (ship margin profit) = 6 mill

Mining:
(6mill(mined ore)+2mill(margin)) - 4mill(difference in isk/time between mining and missions) = 4mill


Stop with your hocus pocus math, Jesus.

This is getting outta hand.

You can´t count 10mill from missions as positive and then right away count 6mill from mining as negative.

GODDAMN!

I've found the best way of describing "Opportunity Cost" is this:

What did you give up in order to do what you just did?

If what you gave up is more valuable than what you actually did, then it could be argued to have been a poor choice. But when determining something's value, remember it's not just the quantitative things like ISK per hour. Value can be more subjective, like learning and understanding the entire process, relaxation (mental health), or just about anything else.

Your friend may not have helped you understand the term, but it's a basic concept and there are plenty of helpful definitions available, e.g., http://www.investopedia.com/terms/o/opportunitycost.asp or https://en.wikipedia.org/wiki/Opportunity_cost.




Based on your question, it looks like you had already heard of the concept of "opportunity cost", but didn't understand it. Your question builds in two elements that make it hard to give a simple "yes or no" answer.


First, whether or not mining is itself at all profitable is not determined by any opportunity cost. Opportunity cost is about discounting that profit by other profits that you could have earned using the same inputs (here, apparently, ISK and time). That is, asking "if it is profitable to mine your own ore" allows for a "yes" even when the profit is pitiful.

For example, mining for an hour may yield 6 million ISK-worth of minerals at a cost of one hour and zero ISK. Let's call that a profit.

The concept of opportunity cost then says: well, what else could you have obtained with a cost of one hour and zero ISK? If any of those other things would get you something more valuable than 6 million ISK-worth of minerals, then the difference between the profit you could have obtained and the profit you did obtain is the opportunity cost. So if, for the sake of argument, you could have run missions for almost an hour and then bought 6 million ISK-worth of minerals with your income and still had 10 million ISK left over, then that 10 million ISK is the opportunity cost when you choose to mine instead (amongst those two options).

Note that the 10 million ISK foregone doesn't eliminate the 6 million ISK-worth of minerals, it just means you could have had more than just the minerals.


Second, you asked about the situation "for less resource demanding manufacturing projects". The concept of opportunity cost applies to projects of any size, and will apply regardless of whether you're talking about a frigate or a titan. You cannot escape it, though you may decide certain numbers don't matter to you. That said, the other options in the contemplation of opportunity cost must at least be available.

So, for example, if it's just impossible for me to mine enough minerals to build a titan, I cannot consider mining all the minerals as an alternative to other activities when assessing those activities for their contribution toward my goal.

Also, preferences are important, especially in New Eden. If I hate running missions and I like mining, that might be an important (and hard to quantify) variable as well. In the example above, maybe I will only spend 15 minutes running missions, not an hour... that's only 4 million ISK in that example, so not enough that I can get the 6 million ISK-worth of minerals I want.... but I do still have 0.75 h left for mining!



Your friend may not understand the concept, but that doesn't mean it fails to apply to New Eden. It's a concept that arises from having options about how resources (like time and ISK) are used in activities, and having goals can be furthered different amounts by different activities. It's thus a concept that has extremely common applicability, and well-recognized analogues in fields beyond economics and investment, e.g., in biological systems.

Now that you understand the concept, you can help other people understand it. The links I provided are web search results: there's no secret in what this concept means, and it's not an "EVE thing". Or just link people here, even.

You could start with your friend!



It may be quixotic to try to convince people to use an alternative term like "Time Management" when there is an existing, widely-used basic economic concept that applies, and which directly explains a key mistake that many rookies make when trying to optimize their activities toward some goal in New Eden: "Opportunity Cost".

Also, why stop your simplification there? How about "Management"? Or even just "make decisions better"?

Since you have acknowledged, that there are people that don´t understand the concept properly, I believe a some kind of simplification of the term should occur.
There are even Vets, that don´t know how to do the math correctly on this matter. They throw the numbers around like bananas and confusing rookies while at it. It´s insane.

I said simplification, not over-simplification. The term "Management" is vague and so is "Make decisions better".
I believe you understand that pretty well, no need to be passive-aggresive about that, sir.

But that IS the issue with opportunity cost. That is pretty much the definition anywhere you look

Microeconomics, by Walter Nicholson, Fifth Edition, page 812,



As ISD Fractal noted, opportunity cost is everywhere. It never is not there. Any time you take and action it applies. And how we value things is subjective. I like to eat stinky tofu. You probably don't. So I put a higher value on stinky tofu than you probably would. This observation does not make either of us right or wrong.

And I'll say that mining is not a waste of time if that is what you like to do. If mining and building stuff is your thing in game...go for it. It is not wrong in that we all have different preferences. As I indicated I do not like running missions.

I have made the argument that while many argue mining is boring and needs a revamp....that maybe it doesn't. Mining tends to be a low attention activity. You can, for example, mine and watch Netflix or a DVD. You can get on comms and chit-chat with buddies. If you have the luxury of connecting while working you could work and earn RL ISK and mine.

So in that regard I'd say your friend is wrong.