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The "Opportunity Cost" Meme has to end.

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Author
Zet Soirn
Soirn Enterprises
#1 - 2016-04-15 12:50:33 UTC
This thread is not an attempt to attack or insult Vet players. I have a great respect for you.

Hello,
I am a new player. I always believed Vets know a lot about the game and don´t spread misinformations.
To my surprise, my Vet friend introduced me to an "Opportunity Cost" term, which I believe has no logic and has to crumble on itself.

I will start with an anecdote. Yesterday, I have asked my friend about the "Opportunity Cost" and if it is profitable to mine your own ore for less resource demanding manufacturing projects.
He said "no". His argumenting was following "If you paid for ore/minerals on market, you have paid 6 million ISK (example). Now, if you mined your own ore, you have paid 6 million ISK and one hour(of mining)."
I was surprised and also deeply disturbed by this logic, which would mean, that there is no point in mining at all. By that logic, miners wouldn´t make any money selling their ores. But they do, right?

You guys don´t realize that, when you mine ore, you generate profit " + " and when you simply buy ore from market, you deduct loss " - ".
Stop using those accounting schemes (I sell the ore I mine to myself, therefore I have paid for it and I check it as a loss) that don´t apply to EvE at all. No, you didn´t have to pay for it. You have paid in time to acquire it. No isk were deducted from your account. There are no expenses, when it comes to mining mechanic, you don´t have to pay for fuel, for renting the asteroids, etc. It just costs time.

Let´s continue with two examples. One uses "Opportunity Cost" reasoning and the other does not.

"Opportunity Cost" reasoning:
You wanna build a ship, let´s call it "Coconut".
To build this ship, you need 6million ISK worth of ore/minerals. You believe that mining is useless and so you simply buy the ore you need from the market. You then build the ship and sell it for 8million, which means you have 2million profit raw(not counting taxes, fees).

"Opportunity Cost Is False" reasoning:
You wanna build a ship, let´s call it "Coconut".
To build this ship, you need 6million ISK worth of ore/minerals. You believe mining can be useful for a manufacturer and so you go and mine this ore, which took you one hour. You realize, you didn´t have to pay for the ore. You have used "time" as a currency to acquire it. No ISK was deducted from your wallet. You reprocess the ore (high reprocessing skills) and see that you have about 6million worth of minerals.
You could sell these minerals, which would generate profit, but then you would have to buy those minerals anyway for the ship, which would generate loss. That would leave you at zero profit and zero loss from selling the minerals and buying them again.
You don´t sell the minerals, because you realize an important thing. With perfect manufacturing skills and blueprints, you can increase the worth of these minerals from 6million to 8million ISK by building the ship, which will once again cost you "TIME" only(not counting industry taxes since both examples have to pay them). You then sell the ship for 8million, leaving you at 8million profit raw.(6million worth minerals+2million ship marge).


Mining is useful and mining generates a profit. "Opportunity Cost" Meme is false. I understand it was perhaps implemented to instruct new players to not think the ore "is free" and then undersell ships they make and makin very low profit, while hurting the market.
Miner doesn´t have to pay for the ore he mines, he acquires it with time. When you simplify it, you could say "The ORE is free". Maybe, but not WORTHLESS! Miners generate worth out of asteroids by mining.
Manufacturer that spends all day docked vs. manufacturer the has active jobs + spends his time mining, generates MORE profit, because MINING IN ITSELF IS PROFITABLE!

Thank You for Your time. Please keep this discussion civil. I have nothing against Vet players, I love you guys, but your reasoning behind "Opportunity cost" just don´t sit well with me.
Catalytic morphisis
Space Mutts
Space-Mutts
#2 - 2016-04-15 13:08:51 UTC  |  Edited by: Catalytic morphisis
the main thing you are failing to take into account is the adverse effects of overall profits due to Time Consumption and Overheads through mining as a manufacturer
As a Capital ship manufacturer it would take me approx a week per ship to mine all the minerals if I were to set up alts and the mining infrastructure.
This is a week on top of an already 10 day production process (In the case of carriers) you then have to account for Skill training times for characters, Monthly account costs (lets call it 1 Billion/Month per account)

Lets call the overall set-up time consumption 2-3 months (Granted this is one off but does have an impact)

broken down this all looks like the below

Mineral procurement time consumption - 1 week
ISK Cost - approx 10 Billion per month character renewal, to maintain enough alts to mine the amount required within a week
Carriers per month - 1 - 2
Total monthly Sales - 1.3 - 3 Billion per month
Total deductions - 10 Billion
Total Profits = -8.7 - -7 Billion per month


Now lets look at the ISK/Time costs per carrier when importing minerals

Build time - 10-11 days approx
Mineral monthly ISK Cost - approx 3 Billion
Sell price per unit - 1.3 - 1.5 Billion depending on the market
Character Sub costs - 1 Billion
Carriers per month - 3
Monthly profits - 200 million to 500 million (If building 1 carrier at a time)

As you can see, Mining and all the overheads that would be needed in this example completely negates the ability to make any Profit, And would see me completely flat broke in no time.

Since I do infact import all my minerals and build far more than 1 capital at a time then my profits are by far higher than that, and I don't need more accounts to PLEX monthly. Not only that but I am not hamstrung by my own ability to mine the specified minerals, Which means I can turn over money far far quicker

This is a far end of the spectrum example but can be scaled accordingly. You must remember that in EVE, Time is Money

Actual Link free and scout free solo PvP'er

Zet Soirn
Soirn Enterprises
#3 - 2016-04-15 13:16:56 UTC  |  Edited by: Zet Soirn
Catalytic morphisis

Yes. I know, I know.
That´s why I have pointed out "less resource demanding".
I know that mass producer has to buy the minerals from market at one point anyway.

I am talking about a single project of building a ship.

And with your arguments, the "Opportunity Cost" still doesn´t have any substance. No offense meant.
Jeronica
Mogul Holdings
Mogul Financial
#4 - 2016-04-15 13:37:13 UTC
Don't listen to him.

Everyone knows that the ore you mine is free!

EVE-MOGUL.COM

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Rhivre
TarNec
Invisible Exchequer
#5 - 2016-04-15 13:37:24 UTC
Why is it a zero sum for buying/selling minerals? This only applies if you buy and sell them at the same time.

If I sell Mineral X at sell order price, and buy mineral X at buy order price, how will that " leave you at zero profit and zero loss from selling the minerals and buying them again."
Thermal Damage
New Order Logistics
CODE.
#6 - 2016-04-15 13:39:38 UTC
b8

I was found guilty of Nitshe by the CoCaP

Caleb Ayrania
TarNec
Invisible Exchequer
#7 - 2016-04-15 13:49:04 UTC
Just because some people relay the understanding of oportunity cost in a faulty way, does not make the concept wrong..

The Ore you mine is NOT free, unless you view your time as free, or have slaves doing that work.

The clue is in the name OPORTUNITY.. What other activity could you be doing that would yield a better bottomline profit. So next before jumping to posting, it might be a good idea to read up on the topic. If someone with skills and tools to run a level 4 mission or incursions is mining his own ore he is loosing isk to oportunity cost, he would in practical terms be better off doing the more profitable work and buying the lower isk/hour work from a dedicated and better trained miner.

So lets agree to continue using the term and the meme, but correctly so..

Zet Soirn
Soirn Enterprises
#8 - 2016-04-15 13:51:38 UTC
Rhivre wrote:
Why is it a zero sum for buying/selling minerals? This only applies if you buy and sell them at the same time.

If I sell Mineral X at sell order price, and buy mineral X at buy order price, how will that " leave you at zero profit and zero loss from selling the minerals and buying them again."


I am contemplating on "Opportunity Cost" theory with that statement.
They say, that the ore you mine, you could sell at some price, instead of building a ship with it.
But if I really want to build a ship, then I will need those minerals anyway.
So, if I sell the minerals on market as "Opportunity Cost" theory suggests, then I will have to buy those minerals again anyway.
So I sell minerals I have mined for 1mill, and then I buy them again on the market for 1mill anyway. So, I haven´t made any extra profit as "Opportunity Cost" theory suggests.
I sell ore I have mined.
Wallet balance:+1000000
I need to buy the ore anyway. We talking the same amount I have sold.
Wallet balance:-1000000

That leaves me with neither loss or profit.
Zet Soirn
Soirn Enterprises
#9 - 2016-04-15 13:56:40 UTC  |  Edited by: Zet Soirn
Caleb Ayrania wrote:
Just because some people relay the understanding of oportunity cost in a faulty way, does not make the concept wrong..

The Ore you mine is NOT free, unless you view your time as free, or have slaves doing that work.

The clue is in the name OPORTUNITY.. What other activity could you be doing that would yield a better bottomline profit. So next before jumping to posting, it might be a good idea to read up on the topic. If someone with skills and tools to run a level 4 mission or incursions is mining his own ore he is loosing isk to oportunity cost, he would in practical terms be better off doing the more profitable work and buying the lower isk/hour work from a dedicated and better trained miner.

So lets agree to continue using the term and the meme, but correctly so..



You realize my whole post is reacting to the statement of my friend, right? Which many people believe, too.
I am commenting on their "understanding of opportunity in a faulty way", as you have said.

What you describe is time managment. The mission runner propably doesn´t have good mining skills, while the miner doesn´t have good mission running skills. They will both acquire those minerals from managing their time.
Mission runner maybe faster, but that is not the point of this topic at all.
Ria Nieyli
Nieyli Enterprises
SL33PERS
#10 - 2016-04-15 14:04:58 UTC  |  Edited by: Ria Nieyli
Catalytic morphisis wrote:
the main thing you are failing to take into account is the adverse effects of overall profits due to Time Consumption and Overheads through mining as a manufacturer
As a Capital ship manufacturer it would take me approx a week per ship to mine all the minerals if I were to set up alts and the mining infrastructure.
This is a week on top of an already 10 day production process (In the case of carriers) you then have to account for Skill training times for characters, Monthly account costs (lets call it 1 Billion/Month per account)

Lets call the overall set-up time consumption 2-3 months (Granted this is one off but does have an impact)

broken down this all looks like the below

Mineral procurement time consumption - 1 week
ISK Cost - approx 10 Billion per month character renewal, to maintain enough alts to mine the amount required within a week
Carriers per month - 1 - 2
Total monthly Sales - 1.3 - 3 Billion per month
Total deductions - 10 Billion
Total Profits = -8.7 - -7 Billion per month


Now lets look at the ISK/Time costs per carrier when importing minerals

Build time - 10-11 days approx
Mineral monthly ISK Cost - approx 3 Billion
Sell price per unit - 1.3 - 1.5 Billion depending on the market
Character Sub costs - 1 Billion
Carriers per month - 3
Monthly profits - 200 million to 500 million (If building 1 carrier at a time)

As you can see, Mining and all the overheads that would be needed in this example completely negates the ability to make any Profit, And would see me completely flat broke in no time.

Since I do infact import all my minerals and build far more than 1 capital at a time then my profits are by far higher than that, and I don't need more accounts to PLEX monthly. Not only that but I am not hamstrung by my own ability to mine the specified minerals, Which means I can turn over money far far quicker

This is a far end of the spectrum example but can be scaled accordingly. You must remember that in EVE, Time is Money


Looks like your business needs a little optimisation. If you have 10 miners, they can plow through the minerals required for a carrier in a day. You're more likely to be bottlenecked by not having enough characters to build the carriers and not enough people willing to buy them rather than the lack of materials. At any rate, you can scuttle the mining characters immediately after you finish gathering the resources, so you don't even have a monthly PLEX overhead for them. Afterwards, you'd have 30b+ worth of capital to work with, so you should be set.
Catalytic morphisis
Space Mutts
Space-Mutts
#11 - 2016-04-15 14:06:51 UTC
Zet Soirn wrote:
Catalytic morphisis

Yes. I know, I know.
That´s why I have pointed out "less resource demanding".
I know that mass producer has to buy the minerals from market at one point anyway.

I am talking about a single project of building a ship.

And with your arguments, the "Opportunity Cost" still doesn´t have any substance. No offense meant.


none taken :P

Actual Link free and scout free solo PvP'er

Catalytic morphisis
Space Mutts
Space-Mutts
#12 - 2016-04-15 14:08:35 UTC  |  Edited by: Catalytic morphisis
Ria Nieyli wrote:

Looks like your business needs a little optimisation. If you have 10 miners, they can plow through the minerals required for a carrier in a day. You're more likely to be bottlenecked by not having enough characters to build the carriers and not enough people willing to buy them rather than the lack of materials. At any rate, you can scuttle the mining characters immediately after you finish gathering the resources, so you don't even have a monthly PLEX overhead for them. Afterwards, you'd have 35b+ worth of capital to work with, so you should be set.


As I stated in there, I don't do the mining, and avoid mining at all costs. I was just using mining the minerals as an example.. so the time taken was a number I just made up as theoretical as I don't actually know how long mining the minerals takes since I buy all of my required minerals.

Edit: The key point was that time is something which I lose if I dedicate to mining, which in ISK terms is 1 Bn per month per account.

Actual Link free and scout free solo PvP'er

ISD Fractal
ISD Community Communications Liaisons
ISD Alliance
#13 - 2016-04-15 14:13:07 UTC  |  Edited by: ISD Fractal
Opportunity cost exists in all cases. I'm typing this post now when I could have been doing something else.

With regards to the situation you described, your friend isn't necessarily wrong. If you are a manufacturer, you're going to spend 6 mil on minerals regardless of whether or not you mine them or buy them. If you mine them yourself, you've now spent an hour of your time doing that when you could have been doing something else. If you weren't going to do anything else anyway, then you might be okay with that, although you still could potentially be doing something that would earn you more ISK.

Your friend's accurate point is that you need not waste an hour mining minerals when you need to value the minerals you mine at the cost you would have bought them at. Truly, the difference between mining them and buying them is the hour you spend mining them. If anything, you should spend that hour mining the most valuable ore, sell it and use that to buy the minerals you need, leaving you with a profit.

People choose to do things even if they know that they can be making more ISK doing something else, and that's okay too. For example, I PvP which loses ISK and I could certainly choose to do something else that makes ISK during that time, but I don't because I enjoy PvP. Similarly, miners mine because they enjoy it or can easily do it AFK while they do something on another screen, which answers the question of why people mine in the first place.

ISD Fractal

Lieutenant

Community Communication Liaisons (CCLs)

Interstellar Services Department

Zet Soirn
Soirn Enterprises
#14 - 2016-04-15 14:19:48 UTC
ISD Fractal wrote:
Opportunity cost exists in all cases. I'm typing this post now when I could have been doing something else.

With regards to the situation you described, your friend isn't necessarily wrong. If you are a manufacturer, you're going to spend 6 mil on minerals regardless of whether or not you mine them or buy them. If you mine them yourself, you've now spent an hour of your time doing that when you could have been doing something else. If you weren't going to do anything else anyway, then you might be okay with that, although you still could potentially be doing something that would earn you more ISK.

Your friend's accurate point is that you need not waste an hour mining minerals when you need to value the minerals you mine at the cost you would have bought them at. Truly, the difference between mining them and buying them is the hour you spend mining them. If anything, you should spend that hour mining the most valuable ore, sell it and use that to buy the minerals you need, leaving you with a profit.

People choose to do things even if they know that they can be making more ISK doing something else, and that's okay too. For example, I PvP which loses ISK and I could certainly choose to do something else that makes ISK during that time, but I don't because I enjoy PvP. Similarly, miners mine because they enjoy it or can easily do it AFK while they do something on another screen, which answers the question of why people mine in the first place.


Yes, yes, I know.

I could do mission running and make 10mill, and then buy minerals for 6mill, which would give me an extra profit of 4mill, instead of just mining for an hour to acquire 6mill worth of resources.
This is more of a time management thing. And in my current situation, I spend my time best by mining, because I have low amount of skill points to do even lvl 3 missions.
I was commenting on his logic, which seemed to be pointing out that mining is useless, which is false.
Timcanpy Yvormes
KarmaFleet
Goonswarm Federation
#15 - 2016-04-15 14:20:01 UTC
But u are forgeting one thing about the mining.

Ok u mine and get the ore, but now u have to refine. If u sell the ore to someine else with better refining skill he will get more mineral.

So if u mine x amount it does mean that u will get that same value in minerals because of or skill. U have to see if it's better for u to refine and use/sell your minerals or better sell the ore and u will end up with more isk that just using

Because u may in the end end up with more isk that refining and using the materials
Ria Nieyli
Nieyli Enterprises
SL33PERS
#16 - 2016-04-15 14:20:03 UTC
Catalytic morphisis wrote:
Edit: The key point was that time is something which I lose if I dedicate to mining, which in ISK terms is 1 Bn per month per account.


Which was exactly my point when I said that you can scuttle the characters after you've done hoovering you minerals with them. After that you wouldn't really have to mine again either, just churn your capital for profits.
Zet Soirn
Soirn Enterprises
#17 - 2016-04-15 14:24:55 UTC
Timcanpy Yvormes wrote:
But u are forgeting one thing about the mining.

Ok u mine and get the ore, but now u have to refine. If u sell the ore to someine else with better refining skill he will get more mineral.

So if u mine x amount it does mean that u will get that same value in minerals because of or skill. U have to see if it's better for u to refine and use/sell your minerals or better sell the ore and u will end up with more isk that just using

Because u may in the end end up with more isk that refining and using the materials


In my post, I have pointed out "high reprocessing skills".
Timcanpy Yvormes
KarmaFleet
Goonswarm Federation
#18 - 2016-04-15 14:26:43 UTC
Then if u have the skill is just better use the minerals

Because in the end u will loose isk selling cause of the taxes
Xylem Viliana
homeless bum
#19 - 2016-04-15 14:27:03 UTC
In the end though it comes down to the individual, do you want to mine build etc and follow the process from rock in space to completed article sold on the market or is it just the money you want, everyone finds their groove.
ISD Fractal
ISD Community Communications Liaisons
ISD Alliance
#20 - 2016-04-15 14:27:58 UTC
Zet Soirn wrote:
I was commenting on his logic, which seemed to be pointing out that mining is useless, which is false.


That's not his logic, that's your logic. He isn't saying that mining in general is useless, he's saying that spending an hour to mine the minerals you would buy anyway costs you more (time plus ISK) than if you just bought them yourself (only ISK), which doesn't make much sense.

He's not wrong in that regard. As I said, if you were dead set on mining you'd be better off spending that hour mining the most valuable ores, selling them and buying the minerals you need afterwards, leaving you with a profit.

This is treading dangerously close to the "minerals I mine are free" mindset that causes many items on the market to be sold at a price lower than it costs to manufacture them if you bought all the inputs off the market.

ISD Fractal

Lieutenant

Community Communication Liaisons (CCLs)

Interstellar Services Department

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