Seems some people are getting more interested in this with the new changes coming and whatnot, and there seems to be some confusion on it and a desire to not litter other threads with this stuff. So here's a breakdown of some of the economics of EvE, in three parts:
1) Sinks and Faucets
2) Inflation, Deflation, and Mudflation
3) Supply and Demand (and why it's not x-flation)
4) Opportunity Cost
I'm sure there's more shit to add here, but that's all i feel like writing.
1) Sinks and Faucets
Sinks and Faucets are a common terminology when discussing how ISK enters and leaves the game. First, it is important to note that it is NOT how it comes to a player, but how it comes into being (or disappears) from the net holdings of the entire game. Second, it is also very important to note that while the conversation always revolves around ISK, Asset sinks and faucets are equally important in understanding the effect on the economy of EvE. Between ISK and Assets only a single item is not included, PLEX.
Rat Bounties - By and far the largest ISK faucet in the game. IIRC it comes out as almost 5 times all of the other faucets combined
NPC Buy Orders - Things like Overseers Effects, or any of the other many items that have a consistent NPC buy order up for them. Through this special Faucet is the route through which wormholes, a place with no bounties, can actually operate as an ISK faucet.
Ship Insurance - Any time a ship is destroyed Insurance is paid out to the person that lost their ship. While this is coupled to an asset loss it is effectively an ISK faucet. It is, however, a special type as you will see below in the discussion of inflation.
Mission Rewards - Self explanatory
Alliance Tournament/One time things - Self explanatory, not that big
Far more interesting
Skillbooks - iirc this is the largest ISK sink in EvE.
Blueprints - Another large ISK sink. This one will go through the fucking roof whenever a new ship type is introduced.
Loyalty Point Store - This one is non-obvious, but it is actually a significant ISK sink. Any time an item is purchased from the LP store some quantity of ISK is put into it as well.
NPC Sell Orders (other) - Beyond Skillbooks and Blueprints there are still a number of NPC sell orders out there. Before the introduction of PI this was a major ISK sink, not so much anymore.
Account bannings - I don't know if numbers have been released for this but I would be surprised if this was not a LARGE amount.
Taxes & Fees - This covers all sorts of taxes (like sell/buy taxes) and fees (brokers fees, production/station industry fees, alliance fees, or office rentals), and other shit like clones. Surprisingly less significant than you would think.
Account Deactivation - A bit of a strange one since it may technically be understood as a liability, but there are (obviously) a large % of players that deactivate their accounts that will never come back.
Rat Loot - All the shit that rats drop all over eve.
Mining - Ice, rocks, gas, moons. All that shit.
Planetary Interaction - Click click click click
NPC Sell Orders - See above
Salvaging - Hold the fleet while I salvage this shit (I've done this when FCing).
LP Store/Mission Rewards - See above, the flip side of the coin.
Microtransactions/Aurum store - Relatively insignificant (thankfully), but worth noting for reasons given below.
Destruction - This is why EvE is better than any other MMO in existence. Shit goes boom.
NPC Buy Orders - Really not sure if this one counts (here or above) since really the truth is that items that are bought by NPC's are effectively a currency. Still worth mentioning them since some of them are used in manufacturing.
Fuel/Charges/Ammo - When you shoot your gun, jump your titan, or fuel your POS something dissapears out of the game forever.
Account Bans - I am quite sure that this is a significant sink in EvE.
Abandoned Assets - Kind of a strange one. Look at your asset list. If you have assets in less than 200 systems then you are a better man than I gungadin. I have assets in systems that I will NEVER access. Sometimes this is because there is 1 asset out in the middle of nowhere, sometimes it's because it's in a station I don't have access to. This one may not be appropriate but I'm including it anyways.
2) Inflation, Deflation, and Mudflation
Getting an exact definition for inflation or deflation is a great reminder of why Economics is more of a liberal art than a science. I'm not going to sweat too much about these definitions, and you shouldn't either. They're close enough. These terms can be understood in the net flow of ISK and Assets, they are dependent on the ISK and Asset faucets that are listed above.
Reduction in the buying power of a currency. In terms of the faucets, this ISK/Asset flow ratio increasing. If there are 10 domi's on market and we all want one and have 100 million ISK, it will fetch a lower price than if we all had 1 billion ISK. It is important to note that both the RATE of flow, the RATE OF CHANGE of flow, and the current SUPPLY of ISK/Asset is important in determining this. It's basically the same thing as Position vs Velocity vs Acceleration. Who says you would never need calculus?
Think of this in terms of a change like, say, reducing the flow of drone alloys into the game while also increasing the flow of ISK into the system. This is an inflationary action.
Another interesting example of this is in Insurance scams. Here you have an act that directly converts Assets to ISK, which takes part of the Asset faucet and turns it into an ISK faucet. This is another inflationary action.
An increase in the buying power of a currency. In terms of the faucets, the ISK/Asset flow ration is decreasing. This may not seem that common, but it does happen (or certain actions push this way) somewhat often.
Consider the SP handout from the Incursion patch, or the recent introduction of the Tr3 BCs. In both cases you had a MASSIVE one time push of a reduction of ISK and an increase in Assets. In both cases the market saw a bit of a deflationary shift (although it was a bit insignificant.)
Also consider Microtransactions. As they stand they are effectively insignificant to the system, but they operate by introducing another flow Assets to the game. If this flow was large enough it would cause deflation.
(Isk/Asset flow is Constant, ISK/Asset/Per Capita increases)
Mudflation is a very special beast, something that doesn't really exist in the real world (except through the progress of civilization), but is very VERY important in MMOs. In a basic sense Mudflation can be understood as a reduciton in "real world value" of BOTH ISK and Assets. Consider this example. Let's say that right now every player had 3 titans and 1 trillion ISK and were able to generate ISK and assets at a rate to replace both of those easily, but the price of Titans was still 80 Billion ISK. This is neither Inflation* or Deflation, it is another beast alltogether.
Mudflation is caused by an increase in the total SUPPLY of ISK/Assets, without actually changing the ratio. If the flow rate of both ISK and Assets were increased in game in a way that maintained the current ratio you would see Mudflation.
Now, the question is, how do you determine "real world value"? Consider, if you will, the dominix. 4 years ago a Dominix cost you (more or less) 50 million ISK. Today (before the recent mineral changes) that same Dominix would cost you (more or less) the same 50 million ISK. But would you, as a person, value it the same? Now I want you to think of another item, one we haven't talked about so far. The PLEX. PLEX is a unique item that actually links real world currency to the game. Hopefully you can see where I am going at this point.
4 years ago a PLEX would net you 100 million ISK (I think). 15$ buys you 2 Domi's. 2 years ago a PLEX will get you 250 million ISK. 15$ buys you 5 Domi's. Now, 1 PLEX will net you 500 million ISK. 15$ buys you 10 Domi's.
Ironically, even though the real world version of mudflation is essentially the progress of mankind, mudflation has some severely negative effects on EvE, one of them being that the consequence driven nature of the game is threatened by the reduction of value of the items within it. It is also the reason that CCP HAS to balance, not just through increasing rewards, but also by reducing them. Dr. E may (he does) pat himself on the back for how well he has managed inflation and deflation in EvE. But when it comes to Mudflation, arguably the most dangerous of the 3, EvE has not done well at all. That said, it's at least done much better than any other MMO, where Mudflation isn't even in the realm of maneagable.
The reason that the Sinks and Faucets of EvE are so VITALLY important to understand is that they directly result in the previous 3 effects. Without understanding the true nature of the faucets and sinks you wouldn't appreciate that doing something like removing all of the macro-miners from EvE may have the exact OPPOSITE effect as something like removing all of the null-sec anom-botters.
*Before I said that Mudflation is different than Inflation and Deflation. If you want to get super technical (ie Douchebag) you can argue that Mudflation is actually a form of Inflation, or, you can argue that it's a supply/demand thing. In a way it's both to some degree or another. But it doesn't really matter and you're a douchebag for getting hung up on it.
3) Supply, Demand, and why they aren't x-flation
I took an Engineering Economics course from one of the dumbest professors I have ever had the displeasure of knowing last year. He admitted that he failed economics twice as an undergrad, and it was blatantly obvious by one of the things he said. He likes to get on his high-horse about politics at the beginning of every class, and during this class he decided to start talking about Oil. According to him, the recent increase in the price of Oil was an obvious indicator of the inflation being caused by the Fed's recent actions.
This is not just wrong, it's stupid. There is a reason why inflation is monitored by indexes, and not individual items, and this is why. In this case, oil prices have increased due to decreases in supply due to the Arab Spring as well as increases in demand due to the modernization of the 3rd world. It could be the case that some of the change is caused by inflation, but trying to draw a clear correlation between the two is like extrapolating how many times you will be married in your life based on your honeymoon and the week leading up to it (nod to XKCD).
The reason this matters is that it's important to know that prices in EvE are not always an indicator of inflation/deflation. They are far more often a result of Supply/Demand changes. Take the current, and very large, increase in mineral prices. Is that inflation? No. That's a reduction of supply in the face of a static demand. Was the increase in the price of Tech after the dominion patch inflation? No, that was an increase in demand in the face of a static supply.
Each of those changes represent major changes in the prices of a small part of the overall market. Inflation/deflation affects the ENTIRE market. That said, I do not disagree that the shift in the drone regions may cause inflation, but it really depends on how much ISK is removed through the overall reduction of bounties.
Anyways, I'm not going to go into all the nitty gritty of supply/demand, I just wanted to impress that it's important to know that price changes in sectors of the market are often caused by supply/demand, and that inflation/deflation affects the entire market as a whole.
Note: If you want to get really technical about it Inflation is actually caused by supply/demand in the money supply. But, yet again, it doesn't really matter and you're a douchebag for getting hung up on it.
4) Opportunity Cost
Opportunity cost is a non-obvious cost incurred when choosing between two mutually exclusive actions. If you can do either A or B, and you do A, you incur an opportunity cost of B. If you have two investment options, one that earns 6% and another that earns 8%, choosing the 6% option incurs an opportunity cost of 8%, creating a net loss due to opportunity cost of 2%. Seems incredibly obvious, so why the fuck am I mentioning it? Well first off Op Cost needs to be further broken down into two sub-sections, the Op Cost of Money, and the Op Cost of Time.
Op Cost has some less obvious implications, in the real world and in EvE. The most commonly talked about example of op cost in EvE is the example of mining. If I mine it, it is free. This is incorrect. This is because you have multiple choices as to what to do with the minerals and those need to be taken into account. Let's say you mine enough minerals to build a Maelstrom. The market will pay you 160 mil ISK for those minerals. This creates an Op Cost that defines the value of your minerals (160 mil). Now, if you were to compare that construction price determined through OP cost to the market price of the Maelstrom (in this case 150 mil ISK), you would see that building your own Maelstrom to use incurs a net loss due to Op Cost of 10 mil ISK (150 - 160). This means that, effectively, you are LOOSING 10 million ISK.
Here's another, less obvious example. Let's say that you have been purchasing advanced building materials with buy orders for something you wanted to build for a while. These materials (unlike minerals) will move in both the buy and sell orders. Let's say you have pulled in 100 Mil in building materials. The market shows that the item you want to build sells for 120 mil. This is a 20 million ISK profit. However, there is another possibility. What if you sell the building materials back to the market? Based on the buy/sell order margin you can see that the building materials would sell back for 130 million ISK. This means that, while profitable, building the downstream product would actually incur a 10 mil net loss due to Op Cost.
Time is as much of a limited resource in EvE as money is, and therefore it is also worth considering for Op Cost. Here are some examples.
-You can either run a series of missions that earns you 100 mil ISK/hour, but requires some active participation on your part, or you can AFK mine and earn 50 mil/hour and go watch Game of Thrones. The monetary OP cost of choosing the second is 50mil ISK/hour. However the time Op Cost of choosing the first is watching Game of Thrones.
-You have 300 order slots to update. Your buddy calls and says that they are going out drinking in 10 minutes and they can swing by to pick you up. You can either go to the bar and have "good-times", or you can update all of your orders. Additionally if you do choose to go out to the bar with your buddies, you have 10 minutes. In that 10 minutes you will only be able to update 30 orders. Each order you choose to update incurs an Op Cost of those you did NOT choose.
-Your Tech moon is coming out of reinforced tonight. An old college flame of yours, who was always down for a good round of the old "in-out" is coming by with her hot ass friend and and they want to drop some tabs and model lingerie to you. WHAT DO YOU DO.
An important note on Op cost is that the reality is that there are at any given moment millions of possible actions you could choose between, and technically each of these choices incurs it's own massive set of Op Costs. Therefore it's ultimately impossible to fully evaluate every OP cost given at any point in time. Really, the whole exercise is to simply make you understand that choices have alternatives, and it's important to think of them. And in case you were wondering about the last choice, the answer is that you go and bag her and end up with AIDS. But it was still the right choice because Op Cost is determined based only on the information known at the time.