An introduction the economic theory on how the price of cuties evolves.
While it might seem a little silly to have a serious conversation about the economics of cutie prices, any hardcore collector really should know the basics of economics. In fact, everyone should know at least some economic theory. This article covers just a few of the aspects of how economic theory can be helpful when collecting cuties and other items, whether digital or physical.
Any discussion about price must start with an introduction to the concepts of supply and demand. People often come across the idea of the “law of supply and demand.” This notion is actually a misnomer. There is no single law of supply and demand. Instead, there is the law of supply and the law of demand. The first law relates supply and equilibrium price while the second relates demand and equilibrium price.
But what is equilibrium price? Equilibrium price, or market clearing price, is the price where the quantity supplied is equal to the quantity demanded. At this price, there is no surplus or deficit generated. Under normal conditions, markets move towards this equilibrium price.
Another important concept in economics is the phrase “ceteris paribus” which roughly translates from Latin as “all else being equal.” It’s a simplification that economists use to be able to talk about general concepts and theory. For instance, the law of supply states that ceteris paribus, the a larger supply means a lower equilibrium price.
To borrow from other forms of collecting, there is a concept known as numismatic value, which is value “relating to or consisting of coins, paper currency, and medals.”
Coins generally have two values: the melt value and the numismatic value. Often cases a silver or gold coin will sell for substantially more than the melt value. That’s because a lot of collectibles have value simply because they are desired and rare. It’s supply and demand. But it’s also not.
Rarity can often generate its own demand, which means that if something is in any way desirable, rarity can amplify that desirability, especially when it is difficult or impossible to produce more of the desired item. Recall that the equilibrium price is the market clearing price, and that markets tend to move towards this clearing price. But if new suppliers cannot enter the market, it’s impossible to reach equilibrium price.
Sometimes demand can increase in additive ways. For a commonly used item, for instance, demand is likely to increase linearly with the population. So adding another member to the population will simply increase the demand by the amount that a normal person consumes. But in many cases, demand experiences multiplicative effects.
Rarity tends to generate such an effect. Demand may increase exponentially with rarity. That’s why a foil mythic MTG card may fetch $100 — $200 a piece, and why a Black Lotus can fetch tens of thousands of dollars. However, because the effect is multiplicative, there’s a risk. If the base demand drops to zero, or near zero, then total demand can drop to zero too, even though the item is rare.
The base demand for MTG cards exists, largely because the game is still played. If people stopped playing the game, base demand would drop. The same is true for cryptoassets like cuties. So long as the game is played, there’s a base demand generated. Rarity can therefore boost demand for a cutie. But if the game disappears or if people stop playing, even a very rare cutie may become essentially worthless. That’s why it’s important that we keep the game alive and healthy.
Economics is an important topic to learn if you’re going to invest in cryptoassets, or engage in any kind of investing. It’s also good to know the basics of economics for general decision making. Indeed, economics is often defined as the theory of decision making under finite resources. With a little bit of knowledge about economics, it’s easier to understand how prices of items fluctuate in a market. These ideas apply not only to cuties and other collectibles, but essentially all goods and services within a market. This discussion however is only a very brief introduction and a very narrow commentary, with a focus on cuties. For a full understanding, I’d suggest taking courses on economics that are offered through services like Coursera or edX.