Economics: A Guide for Entrepreneurs

The word entrepreneur has several meanings to it, although everyone might have a slightly different definition. There is, of course, the archetype of the brilliant college student, scribbling away business models inside the dorm room, full of youthful enthusiasm, said to be the next “Steve Jobs." Then there is also the corporate entrepreneur, who is, essentially, following the same definition (by Schunpeter) of an innovator with initiatives that lead to economic development but is within a systematic organization (also known as an entrepreneur). There is also the interpretation of Kirzener, who sees entrepreneurship as a search process involving profiting from imperfect market system trends. In this blog, an entrepreneur is interpreted as all of these definitions and more. It is for anyone and everyone. As long as you even have a vague idea of the term, this blog is here to simplify the core concepts of micro and macroeconomics into a guide built specifically for you. 

For a start, you need to be sure of your idea. Now, classify whether you are offering a product or a service. For example, if you have started a food truck, that would be classified as a product (the product being the food). The basic principles of demand loosely confirm that:

Prices ↑ = Demand ↓  or  Demand ↑  = Prices ↓

This makes producing products or offering services based solely on this very confusing, which is why we also introduce supply to the scale. Giving us a graph that looks like this: 

This shows us what we previously mentioned about demand and how supply quantity also has to work based on the demand to find the center point or equilibrium. 

To explain more easily, think of this as your taco truck. The amount of money people are willing to pay for a taco will be based on how much they consider it as valuable. So, there will be fewer people willing to pay $10 for a taco (decrease in demand), and more people are willing to pay $5 for a taco (increase in demand). Now, here is the difference between a large scale business and you as an entreprenuer: you control your supply rates. This makes it much easier to meet equilibrium by matching your supply rates to demand. 

But there are other factors you need to consider that might change the values on this scale. Since you can control the supply, there are only two things that can happen:

1. Demand increases

2. Demand decreases

These two factors may be affected by external or internal factors. Changing the price can affect the demand, but so can other elements, like availability of substitutes (competition with lower prices) or preferences such as demand increasing on days tacos are culturally relevant, for example, Cinco de Mayo. Understanding the supply and demand scale might help you make decisions, for example, whether to keep prices lower or have a sale on Cinco de Mayo to further increase sales. This would also mean increasing supply, so as an entrepreneur, you must keep in mind factors that could affect demand to meet equilibrium. 

Now, if you are an entrepreneur, you need something in your product or service that differentiates it from larger sellers, or you will have elastic demand. What does this mean? It tells us how sensitive your sales are to a change of price. Or simply put, how much people are willing to pay for your product with the price increasing before they go to a substitute. Say burritos, for example, can be replaced by a lot of other foods, so it has elastic demand. Because 10 people will pay 5$ for a burrito, but only 2 people will pay 10$ for a burrito, and the rest of the customers will eat a taco (or anything else). But if the product is, for instance, gasoline, that has almost no substitutes (unless the prices go so high you are willing to buy an electric car), gasoline will have a more inelastic demand. 

                       Elastic demand                                          Inelastic demand 

Ideally, you want to have inelastic demand so your prices can go higher without changing much of the customer base. But elastic demand is very likely due to larger-scale competitors. Therefore, do not go out into the market with a product or service that can be easily substituted. 

Now that you can make pricing decisions, it is important to understand profit and loss. This is the most basic concept of money-making, and a lot of you might already know it. Profit and loss is measured over an income or P&L statement. It is where you calculate how much money you have made or lost over a period of time. For this, we must first define revenue and expenditure:

Revenue

Total amount of money acquired in the period of time

Expenditure

How much you had to spend to sell the products or services from which you acquired revenue.

The income statement show whether we are in profit or loss and by how much through this: 

Revenue>Expenditure = profit

If we make more money than we spend, we make a profit.

Expenditure>Revenue=loss

If we spend more than we make, we make a loss.

The formula for calculating profit or loss is the same: 

Revenue-Expenditure= profit or loss 

In the example we used previously, if we made 80$ from selling tacos this week but we spent 100$ in making them, we will make a loss.

80-100= -20[loss]

A way that we can get more revenue and, as a result, profit is by increasing the price of the product to meet the cost of its production. Therefore, if the cost of the taco (from the 80$ we made) was 2$ per taco, we could sell the tacos for 5$ more, counting the money it took to run the shop as well as the profit we would make. The higher the difference between the cost price and selling price, the higher the profits we make. 

Once we do start actually making money, there are two ways we can go about spending it. Firstly, we can put it into the liabilities. The liabilities are anything we might owe a third party that we used to start a business. Perhaps the payments for the equipment borrowed for the food truck (short term liabilities) or the long-term loan taken to start this business (long term liabilities). If we have fewer liabilities, we might spend the money on assets for the business, such as printing posters for marketing (current assets) or equipment required to make more food (long-term assets). 

Lastly, it is extremely important to register your business as soon as possible and get any licenses if required. This is a crucial step you cannot miss. 

All of these economic factors might help you understand how to work your business, but if you don’t have the drive for it, you will never do it. The base for a good start-up is still the idea and dedication to it. We know you will be able to succeed and wish you the best!

Don't overthink!

Don't overplan!

You can do it!