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ECON101: The Neopian Market as a Perfect Market

by uninstructed


You see that Krawk in the corner? Yeah, the one that seems to be raking in the Neopoints because she seems to know what is going to happen in our economy before it happens? That is Aurelise, and she is an economist by trade. In economics, many people make certain assumptions about the market they are trying to interpret; one of these assumptions is that the market is a "perfect market." A perfect market is a market that has perfect competition, perfect information, no barriers of entry or exit, and is a complete market. While no market can actually be defined as a perfect market, Neopia comes very close to it and this a good thing as it allows for Neopians with enough forethought to be able to make decisions that will benefit them. The Neopian market has most elements of perfect competition, perfect information, and a complete market and as a result is almost a "perfect market".

A market that has "perfect competition" is a market that has no participants that are large enough to have the market power to set the price of an item. Due to the many Neopians that participate within the economy of Neopia it is hard to have a monopoly over a certain industry or category of items. This aspect makes for a healthy economy because as a result, everyone is a price taker and not a price maker. For example, there are too many users selling Codestones within the Neopian Market for one person to be able to set the price of Codestones. If the price of Codestones is too high in one shop, there are five other shops that will take its place. It would be very difficult for an individual to significantly affect the price of Codestones within the economy due to the amount being sold and the fact that anyone can sell them and obtain them. By having near "perfect competition" within the market we ensure that prices accurately represent the supply and demand of items and prevent artificial inflation by an individual market power.

If a market has "perfect information" then it is assumed that all participants in the market are rational, they will choose the best product for the best price. While there is no guarantee that every participant in a market is rational, Neopia has elements at work that at least set up the potential for everyone to choose the best product for the best price and therefore we can assume (hope) that most people will be a rational participant of the market. One of the best aspects of items within Neopia is the fact that all items of the same name are identical. One "Main Codestone" is no different from another "Main Codestone" this similarity eliminates any pricing differences that could occur if there were quality differences between items of the same name; because a "Main Codestone" is the same as another "Main Codestone" no one can claim that their "Main Codestone" is the best quality for the best price and therefore all "Main Codestone" can reasonably be priced within the same price range. Perhaps the best resource for making "rational decisions" within Neopia is the shop wizard. The shop wizard allows Neopians to find the lowest priced items within a certain username grouping, this ability allows people to accurately buy and price items within the Neopian market. By having this ability people now have enough information to make "rational decisions" within the market and this translates into having almost "perfect information".

Being able to enter and exit a market as an individual pleases is a strict guideline for having a perfect market. Fortunately, the Neopian market is set up in a way where there are no guidelines about how to enter or exit the market; you can simply decide to start up shop or close down. By having this option available, you allow for people to sell what is profitable, for example if plushies suddenly become wildly popular such that the demand for plushies exceeds the supply for plushies more people will start to enter the plushie market until the supply equals the demand (which can happen with a combination of increased supply and increased prices). Additionally, once the plushie fad has faded the current market, it allows for people to drop out of the plushie market at no additional cost to them. This is beneficial because it allows for people seeking to make the most profit a way to continually make profit by keeping up with user trends.

The last element that the Neopian market requires for a perfect market is to be a "complete market." For a market to be a "complete market" ever participant of the market must be able to exchange every good with every other participant without transaction costs. The definition of "transactions costs" in this particular example is much broader than perhaps a monetary fee put upon each transaction. Transaction costs can also include "externalities," costs/benefits that results from an activity or transaction and that affects an otherwise uninvolved party who did not choose to incur that cost/benefit. Thankfully, Neopia has developed the technology to eliminate negative externalities like air pollution, and light pollution, such that they do not have to be taken into account when making transactions. Unfortunately, this also takes out any chance for positive externalities as well. Neopets cannot provide group immunity to other Neopets from certain illness and Neopets can fall ill to the same illness multiple times. Therefore by deciding to cure your Neopet of an illness there is no positive externality for doing so.

Since Neopia has an almost "perfect market", putting economic theory to work becomes much easier than it would in other, more complex, scenarios. Not only that, it's also much healthier for individual participants of the market as well. Individuals do not have to be part of some elite group to make a profit in the market and they don't have to pay taxes! (Don't get any ideas, TNT!) Additionally, by realizing that the Neopian Market runs in this way you can use this knowledge to maximize your profits, for example selling complimentary items is one of the best ways to make a profit, but the amount that could be said about complimentary/ substitute items is enough for another article entirely.

**DISCLAIMER** This is a very basic explanation of a concept that can have a much more complex discussion than the one held within this article. There are many different aspects that should be considered when attempting to interpret the economy and some of these aspects have been overlooked within this article.

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