Heya fellow $Farmers, farmerjon here again! By popular demand (and by that I mean only 1 person LOL), farmerjon has come out of retirement once more! After reading some comments in the Harvest.Finance discord, farmerjon can't help but write another blog post about the economics of $FARM. It literally takes more effort to read some of your questions than to write this post so here's a post for charity's sake. Speaking of charity, if you are feeling charitable, I would GREATLY APPRECIATE if you could follow my son, Chad, on twitter. He needs more $FARM to buy followers and farmerjon can only give him so much.
(1) Economics 001 - Supply and Demand
For those of you who have even a little knowledge of economics, you might have come across the concepts of Supply and Demand, and how Supply and Demand affects Quantity and Price. Here is a chart in case you replaced that knowledge with memes:
The Basics of the Basics:
- Demand: The demand curve is almost always downward-sloping as buyers SHOULD want to buy more of a product ($FARM) at a lower price.
- Supply: The supply curve is almost always upward-sloping as sellers SHOULD want to sell more of a product ($FARM) at a higher price.
- Price: The point where the demand and supply curve meet SHOULD be the current price of a product ($FARM), as that is where the buyers and sellers deem the price to be fair.
- Quantity: The point where the demand and supply curve meet SHOULD also represent the amount of a product ($FARM) traded at the current price (volume of $FARM).
Easy? I certainly hope so!
(2) Economics 002 - Shift in Demand
Now, something slightly harder. There are some events which may cause the demand curve to shift. The demand curve may shift left or right, but in this post let's focus on a shift to the right:
When the demand curve shifts to the RIGHT, both Price and Quantity increase. Why? If more people want to buy a product ($FARM), the sellers of that product ($FARM) SHOULD be able increase their prices to lock in a greater profit. Sellers SHOULD also be able to sell more of the product ($FARM) due to the increase in the number of buyers, which increases the Quantity of the product ($FARM) sold in the market.
What could cause a rightward shift in the demand curve then?
- Increase in income (i.e. if the price of BTC or ETH increases, $FARM would seem relatively cheaper to BTC or ETH holders)
- Change in preferences (i.e. if the crypto market discovers that $FARM actually has value due to its cashflows unlike other shitcoins)
- Increase in price of substitute (i.e. if $YFI's price gets too expensive and people start to look for alternatives, like $FARM)
- Expectations of future prices (i.e. if the crypto market thinks that $FARM is going to the moon and there is high level of FOMO)
Not THAT hard, I hope!
(3) Economics 003 - Shift in Supply
Now, let's apply the same concepts to the supply curve! Similar to the demand curve, the supply curve can also shift to the left or right. Let's focus on a shift to the left (because we all moonbois here right?):
When the supply curve shifts to the LEFT, price INCREASES but quantity DECREASES. Why? If there are less of a product ($FARM) for sale, the buyers SHOULD be willing to pay a higher price for that product ($FARM). Quantity of the product ($FARM) sold in the market SHOULD also decrease as the product ($FARM) becomes more scarce.
What could cause a leftward shift in the supply curve then?
- Perception of sellers ($FARM holders think that $FARM is not worth selling at the current price)
- New technology (Harvest.Finance devs come up with new strategies to increase the utility and value of $FARM, causing $FARM holders to be reluctant to sell)
- Government Policies ($FARM holders vote to cut the total supply of $FARM from 5,000,000 to 690,420)
There we go! All done!
Now that both the BUSINESS of Harvest.Finance and the ECONOMICS of $FARM have been covered, would you PLEASE let farmerjon retire in peace? Thanks.
(P.S. the SHOULDs are all in caps because traditional economic theory assumes rational market participants, and we all know how irrational the crypto market is, amirite?)