Virtual economies tickle me in a very nerdy way. Economic savvy is as second nature to humans as gravity is. Oh, we may not understand it one bit--but almost any adult can lob a football ten yards to his friend. The calculations of such a feat are impressive, plotting a curve with multiple resistances. Yet it's something even the dumbest of us can do.

Economics are very similar. No, not everyone understands the theory. But even chimps seem to understand fairness and the idea of paying for goods or services received. Just because we don't think about it all the time doesn't mean we're not good at it.

I, however, do think about it frequently. Maybe I just have too much time on my hands. Whatever, I find it interesting.

The economy in WoW is vastly different than a real-world economy. In the real world, value adds (middle men) account for a great percentage of wealth generation. In WoW they do not. In the real world, services are king. In WoW it's all about raw materials. That said, the WoW economy is a simplification of one that might exist in the real world.

Gold poofs into existence, changes hands, and is finally removed from the economy via a large number of money sinks. There are only three ways new currency enters the economy:

1) Looting gold from corpses
2) Selling items looted from corpses or obtained via quest rewards to NPC vendors
3) Completing quests

All the billions of gold in the WoW Universe can be individually traced to one of these three sources.

There are many ways gold exits the economy. Repairs. Auction house fees. Flight paths. Mounts. Training. The list goes on.

If more gold enters the economy than exits a surplus develops. Over time, this would likely lead to inflation (the price of goods on the auction house increasing.)

It's important to note that money spent on the auction house or for player-provided services has no effect on the overall economy. Other than the auction house fees, this is simply gold changing hands. When you spend gold in this way it is not actually leaving the system--it's merely changing hands.

With the basics out of the way, more interesting problems can be tackled. For example, in the next patch the number of daily quests one can complete will be increased from 10 to 25. What affect will this have on the economy?

First we must determine if this will cause people to start completing more daily quests or not. I have no data on this--it could be that few people actually do all ten dailies currently. If people don't start doing more dailies nothing changes. If they do, however, more gold will be entering the economy than before.

Will the owners of this newfound gold be primarily hoarders, sinkers or spenders? Hoarders simply like having as much gold as they can and are unlikely to spend it on money sinks or the auction house. This gold is both meaningless and dangerous at the same time. Meaningless because until it actually enters the player economy it has no weight. Dangerous because the sudden infusion of a ton of gold could cause significant short-term fluctuation.

Sinkers save their gold until they can afford the money sink of their choice. For most people this is probably their epic mount. This gold has no weight on the economy.

Spenders spend their gold on the auction house or services (enchanting, jewel cutting, etc). This is where changes in the economy can happen. Assuming people want to spend their gold we must enter a more difficult area of analysis--supply and demand.

Let's take a simple commodity such as adamantite ore. If people suddenly have more gold than they did before, will the price of this ore inflate? Not necessarily.

Is there currently enough ore on the market to satiate demand? If not prices will be rising regardless of how much gold is in the economy. If there is just enough ore to satiate demand prices will remain fairly consistent. If there's a surplus of ore prices will probably fall as sellers try to undercut each other to sell their goods.

Given that people have more gold, will they be more willing to spend it on ore? If so, demand will increase, possibly upsetting the equilibrium and causing a rise in prices.

Given that people will be able to make more gold via dailies, will fewer people mine? If so supply of ore will decrease, causing prices to rise.

There really is no answer to these questions, only assumptions. My thoughts are that for commodities like ore supply and demand tend to stay fairly consistent for the most part. As more gold enters into the economy the price of these commodities will likely increase. For miners and herbalists this would be a grand thing--more income for the same effort.

Who knows? In any case, it's fun to think about.