There are endless reasons why some entrepreneurs get better results than others. Some entrepreneurs are better marketers, salespeople, and others just know how to delegate responsibilities to experts.
There’s another important factor that distinguishes successful entrepreneurs – a firm grasp on economics.
Understanding economics isn’t just applicable to the stock market.
Having a background in economics when starting a business provides several important advantages. For example, having a degree in economics gives you in-depth knowledge of statistics, an understanding of finance, and a strong understanding of risk and probability.
Understanding statistics will help you discern profitable investments, appropriate price points, and how to manage a complex budget. The advantages of understanding finance stand alone. Running a business requires dealing with money at all points, from obtaining investment capital to calculating profits. Finally, understanding risk and probability will help entrepreneurs determine potential ROI on various investments and determine if the potential return is worth the risks.
You don’t need an economics degree to learn necessary skills.
While pursuing a degree in economics is one way to round out your skills, you don’t need to take that route. To make it simple, enrol in some online courses to learn about economics and political science. There are multiple subjects and niches to study like cryptocurrency, service automation, data analysis, and finance courses related to real estate.
Take the courses that relate to your business and appeal to you, but don’t limit yourself to industry-specific courses. For example, you may not be in the cryptocurrency industry but learning about cryptocurrency can give you a business advantage should you decide to accept Bitcoin payments in the future. You also might see possibilities in using blockchain technology to disrupt your industry once you understand how it works.
Understanding economics is essential for marketing.
Economics is really about understanding markets. The economy drives value in the minds of consumers; businesses need to understand value perception if they want to cash in on a consumer’s willingness to pay more for perceived value.
In an interview with Forbes addressing why company founders should learn economics, Associate Professor of Economics and author Anthony J. Evans explains several ways economics drives marketing. For example, consumer surplus is a basic economic concept integral to determining a company’s product price points. Consumer surplus happens when the consumer is willing to pay more than the current market price. The purpose of consumer surplus is to provide extra customer satisfaction.
Consumer surplus is derived from another economic theory called marginal utility. Marginal utility happens when a customer gains from an additional unit of a product or service. Investopedia describes these concepts in depth.
Another point Evans makes is that entrepreneurs need to understand macroeconomic indicators. He makes the point that policy decisions impact planning decisions and it’s therefore important for an entrepreneur to understand the mindset of bankers and government officials that leads to their decisions. Evans firmly believes more startups would survive if they had a better grasp of economics.
Understanding economics can lead to faster growth.
Entrepreneurs need to understand economics to see consistent growth in their business. A business can become profitable in the absence of economic understanding, but as that business expands, a lack of economic understanding will undermine resources and decisions.
According to entrepreneurship experts from the Edward Lowe Foundation, there are seven economic principles every entrepreneur needs to know:
- Risk and return
- Marginal benefits and costs
- Opportunity costs
- Sunk costs
- Supply and demand
- Elasticity of demand
- Differential pricing
These economic principles can help guide smart business decisions. For example, sunk costs take on a different meaning to a business owner with a background in economics.
Without an economic understanding of sunk costs, an entrepreneur might avoid upgrading business technology when past expenses can’t be recovered. For instance, say a business owner recently spent $10,000 building a company network and they need a faster network. They’re unlikely to invest another $10,000 in a new network because the previous $10,000 can’t be recovered.
That same entrepreneur, with an economical understanding of this predicament, will disregard former expenses and not factor unrecoverable costs into future decisions.
Understanding economics provides a business advantage.
Entrepreneurs are always looking for ways to gain an advantage in business. If that sounds familiar, while you’re honing your marketing and sales skills, take a little detour into the world of economics. By understanding basic economic principles and allowing that knowledge to drive your business decisions, you’ll stack the odds in your favor.