Hello everyone! We are back again today with another edition of Splinterland Economics - a series in which we introduce a basic economic concept and then apply it to Splinterlands. If this is your first time reading, just to tell you a little bit about myself: my day job is in an unrelated area but I consider myself a little bit of economics nerd - I read a little (or maybe way, way) more news than I should, double majored in econ, and am obsessed with optimization. I love the way Splinterlands is equal parts card game and resource allocation game. My goal with these articles is to share a little bit of what I know with you all.
Our subject today can help you to analyze what is happening in markets, and to evaluate the valuations of particular goods and items both in Splinterlands and elsewhere. Today, we'll be talking about Elasticity!
What is Elasticity?
Elasticity is a measure of how much one value changes in response to changes in another value. Do note that there are plenty of types of elasticity - elasticity with respect to income, elasticity with respect to various other related goods, or elasticity of supply all come to mind, but today we are going to be primarily discussing the price elasticity of demand. In this case, we are referring to how the quantity demanded of a particular good shifts in response to changes in price.
If you are familiar with supply and demand at all, you might remember that as price increases, the quantity supplied will tend to increase and the quantity demanded will decrease. Elasticity, and specifically price elasticity, tells us how much the quantity supplied or demanded will change when the price moves. For example, if the quantity demanded of a particular good would increase by 2% if price decreased by 1%, then the price elasticity of demand would be 2/1 = 2. We refer to an elasticity of greater than 1 as "elastic", and an elasticity of less than 1 as "inelastic".
Elasticity is useful in being able to maximize revenues in the real world. For example, if the price elasticity of demand is greater than 1, then we know that we can increase total revenue by lowering the price. On the flip side, if demand is inelastic (price elasticity < 1) then revenues may be increased by raising the price. Elasticity also has policy implications. For example, higher taxes may be applied to goods which have inelastic demands, because the taxation will result in smaller changes to the quantity bought and sold, and can therefore result in greater tax revenue. Think of taxes on gasoline or cigarettes (relatively inelastic goods), compared with taxes on clothing or electronics (relatively elastic goods).
How do we apply it to Splinterlands?
Elasticity is an important tool in evaluating how valuable an asset is because it informs us what can happen to the price of that asset in different conditions, and the Splinterlands economics game is all about figuring out how to price different types of items. In Splinterlands, the most common asset we work with is cards, and a card's price elasticity is directly tied to its usefulness in battle.
You can also see price elasticity in action with bulk Collection Power rental prices over the course of a season. At the beginning of the season, rates may be cheaper since people care less about ratings or can stagger their rentals. In other words, CP demand early in the season is more elastic. Later in the season as the leaderboard chase heats up and the end of season approaches (with the big end of season reward chest reward) people care more, have more urgency, and CP demand becomes inelastic. Understanding this context, it is no surprise that rental rates skyrocket at the end of the season!
Looking at events through the concept of elasticity also helps us to gain more insight into decisions made by the Splinterlands developers. Did you think that the recent Waka Spiritblade card was too expensive? Clearly, the developers thought that the demand for an exclusive promo card was very inelastic so they could charge a high price - and they were right! Looking at another developer decisions such as the recent choice to offer Chaos Legion packs at a price twice as high as previous releases also gives us some insight into what the developers think (accurate or not) about the price elasticity of demand for packs.
Why should we care?
Understanding elasticity will allow you to more accurately determine how valuable a card is. Is it so useful that it can help you to win games under a wide variety of battle conditions? The price elasticity of demand for that particular card may be very low (inelastic), and you may be able to make a large profit by renting that card out. On the other hand, is a card more in the "nice to have" category? Well, you might have a hard time earning a premium return from that one.
Applying elasticity to market behaviors you observe can also help you to understand what is going on and to make the best decisions about how to use your assets. For example, when you see inelastic demand leading to rental prices skyrocketing at the end of a season, you may choose to rent less cards yourself, or even rent out your own cards, rather than keep them for your personal use.
Whenever you see news or announcements from the developers, take a second (or more!) to think about the impact on all of the different game assets. Announced changes to ranked play or the availability of new cards can dramatically impact the usefulness and/or elasticity of demand for particular items or currencies. Was a new format just announced that will allow certain cards to be more useful? Was there a new way to use your SPS or vouchers? Well, taking the time to think about the impact of those events can allow you to make more informed decisions about whether or not it's a good time to buy or sell.
At the end of the day, knowing the price elasticity of a particular item allows us to assign it a more fair price, and to utilize it in the best way possible. While calculating a precise elasticity or figuring out the true value of something in the real world is far from an exact science, understanding the concept gives us a great framework to make our best guesses and end up correct just a little more often.
Thank you so much for reading all the way to the end. Interested in seeing some more of my writing in the future? Be sure to give me a follow! In the meantime, if you'd like to see some of my recent posts:
I Know What you Did Last Summer - Using Goblin Psychic in Battle! - This week's battle challenge, featuring Goblin Psychic!
Splinterlands Economics: Marginal Analysis - An introduction to Credibility, and insights it gives us into Splinterlands.
Splinterlands Economics: Compound Interest - A introduction to compound interest, and how it can help you out in Splinterlands.
Thinking about giving Splinterlands a try but haven't signed up yet? Feel free to use my referral link: https://splinterlands.com?ref=bteim, and be sure to reach out to me if you have any questions!