Designing a virtual economy is a complicated task. It is a balancing act between your game design and artistic design; it can also involve meta-game design factors (such as your company's financial model).
Let's remember that the point of an economy is to facilitate the players transferring value between each other. Money is generalized value. That is to say, it should an abstract thing that you can convert into many different types of value.
What counts as value? Among other things, power points and pretty points. Power points include that Longsword of Dragonslaying and the Potion of Swiftness- things that will make your character more powerful, enabling you to overcome more difficult challenges. The addition of power-point-items is restricted by your game design. Pretty points include the barber-shop giving you a new hairstyle and that cute puppy pet that follows you around. They're aesthetic and don't involve core game mechanics. The addition of pretty-point-items is restricted by your artistic design.
Design of a good economy is largely matching money flow to value flow.
If an item of value is sold by a merchant, it introduces more value (the value of the item) into the world and takes money (the purchase price) out of the world. When money flow matches value flow, prices remain stable. It also makes it easier to keep money flowing between players. Here are some other game events and how they’ll affect the balance of money and value:
- Player buys an item from another player (no change)
- Player sells an item to an NPC (value--, money++)
- Player kills an NPC, who drops an item (value++)
- Player kills an NPC, who drops money (money++)
- Player spends money at an NPC blacksmith to repair armor (money--)
- Player completes a quest with a reward of money (money++)
The ways that money and value enter and leave the economy will depend on your game; the above list might work for WoW and not for your game. But you'll need to understand what events in your game will affect the amount of money and value in your game's economy.
What are the benefits of a good economy?
In a good economy, buying an item costs an amount of gold that matches its value. Super items cost more than basic items.
In a good economy, the price of a good item can be driven up by the players buying those items; crafters can see that, make more of the item, and the price will fall again.
In a good economy, money is just as useful for top-level players as it is for new players. There are high-level things that require money just as there are entry-level things that require money.
In a good economy, crafters can find a buyer for their product if they set a fair price. Not only that, they can sell it for more than the cost of materials. That's because materials (value) + work (value) = item (value).
What are the problems of a bad economy?
If money supply outpaces value, money will become less meaningful and people will stop accepting it in trades. If there's another item that ends up being better currency than actual money, they may switch to that (see the Stone of Jordan in Diablo II). If they can't find another suitable currency, trade will dry up; this will make certain playstyles (such as the crafter) less broadly appealing.
If value outpaces money supply, you'll typically run into the problem of hoarding: a few players will have all the money. This will dry up trade for most players, and only the few rich, well-established players will have access to the “real” economy. This makes your game less appealing to newcomers.
If your crafting system isn't balanced well- if the created items don't have the right amount of power points or pretty points- the work of a crafter will actually add negative value, and they'll have to sell their product for less than the cost of materials. Very few people will want to craft in that circumstance.