Much has been made about the economics within the World of Warcraft, and I think it's about time that a few myths are dispelled and a few facts are explained. Let's start with the basics.

What is this Economy?

When speaking about the "economy" in World of Warcraft you are talking specifically about the value, cost, and exchange of goods and services within the game.

Just like a real economy right?

Not exactly, real world economies are usually supported or "backed" by some governing body and limited by resources. The World of Warcraft economy is driven purely by technology and resources.

What does that mean?

It means that while in the real world a regulating body regulates the sale of goods and limited resources limit their production. On WoW resources are ultimately unlimited and there are no regulations involving trade. The only thing that alters the WoW economy is supply of resources and changes in technology(read: content).

So what you mean is that in WoW things tend to become less expensive over time as supply always increases exponentially. The economy only resetting itself when a new set of resources is released?

Correct.

What about the AH people are constantly undercutting my prices by tons! Even when supply is limited!?

Are they really undercutting? Perhaps they are working with a different set of guidelines. For example;

If player x can sell 1 item per day at 200 gold profit each time turning that profit around to produce more items and selling 1 per day at 200 gold profit he will make 200 golf a day.

If player y can sell 1 item every 12 hours for 150 gold profit then turning that faster sale into more items he will make 300 gold per day.

But doesn't that ruin the economy?

Not at all. This example is the basis of what economics is all about, two distinctly different business models reaching for the same goal.

Which one is better?

That depends, as long as demand is high both should prosper but as demand starts to taper off most likely the player who operates more efficiently and can thusly sell cheaper will undoubtedly thrive more.

What about buying stuff off the AH and reposting it?

Welcome to the stock market! By purchasing something off the AH or investing your time into farming something you are basically investing in the value of said item. If you are able to buy low and sell high congratulations you win! If time spent farming is worth less than the gold you make once again you win! But be careful if supply explodes you mitt be left holding the short end of the stick on that investment.

Now there is a lot more that goes into what makes the WoW economy tick on a daily basis but this is the gist of it.