6 Important Economic Concepts You Should Know
Economics can sometimes feel daunting, especially if you don’t have a background in the field. While economics can be a complex subject at more advanced levels, at its heart are key foundational concepts. Taking the time to build your understanding of these concepts can enable you to learn more advanced ideas and theories down the line.
Whether you’re looking to expand your economic knowledge for career advancement or general professional growth, here are six key economic concepts you should know.
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6 Important Economic Concepts
1. Supply and Demand
The relationship between supply and demand sits at the heart of most economic theory, for a simple reason: They are inextricably linked. The law of supply and demand can be explained as follows:
When supply of a good or service exceeds its demand, prices will fall until an equilibrium is reached. Conversely, when demand for a good or service exceeds supply, prices will rise. This second point is referred to in economics as scarcity.
Though relatively simple in concept, the relationship between supply and demand is a crucial one to understand.
2. Market Demand
In order to effectively develop, market, and sell your product or services, you must have a firm understanding of the market demand that exists for them. This is particularly important in the earliest stages of launching your business or product, as you decide whether or not it’s likely you’ll achieve a positive return on investment (ROI) for your endeavor.
How you go about gauging market demand will depend on a number of factors, including your budget, the type of product or service you’re selling, and how disruptive your product is to the established market. That being said, some options you might consider include:
Conducting customer or user interviews
Running polls or surveys of potential customers
Leveraging third-party data
Analyzing your competitors’ products or services
3. Willingness to Pay
Willingness to pay (WTP) is the maximum price a customer is willing to pay for a product or service. These prices can also be a part of a scale or range of prices, depending on the differences in the customer population. Because your customers’ willingness to pay will impact everything from the features you include in your product or service to the price you charge, it’s crucial that you have a firm understanding of how it works.
It’s also important to understand that willingness to pay can vary significantly from individual to individual based on certain differences in your customer population, which are usually broken out into two key buckets: Extrinsic and intrinsic.
Extrinsic differences are demographic factors, and are sometimes observable. Examples of extrinsic differences include age, gender, race, income, and education level.
Intrinsic differences are factors that you would find out by asking specific questions and not something that you are likely to be able to identify just by observing someone. This might include an individual's risk tolerance, desire to fit in with others, and their level of passion for different subjects.
4. Conjoint Analysis
If you want to dive deeper into demand for specific product features, you need to know conjoint analysis—a statistical approach to measuring consumer demand for specific product features. This tool will allow you to get at the surprisingly complicated feature and price tradeoffs consumers make every day.
For example, imagine you work at Apple Inc. and you want to know what part of the iPhone you should improve; battery life, screen size or camera. A conjoint analysis will let you know which improvement customers care about more and will be worth the company’s time and money.
5. Cognitive Biases
There are hundreds of examples of cognitive biases that affect customers’ decision-making processes, and as such, are useful to understand in an economic context. For example, there may be an element of your product or service that clashes with a belief or assumption a potential customer has. Being able to listen, understand, and address these concerns if and when necessary is a crucial skill to develop, and can help you craft more effective marketing strategies for your product or service.
6. Key Strategies
Business strategy is a field in and of itself, but because many business strategies directly tie back to economic performance, it’s important to understand key strategies at a high level. Some of the most important tools and frameworks to understand are Porter’s Five Forces, SWOT Analysis, and Core Competencies.
Porter’s Five Forces
Porter’s Five Forces, coined by Harvard Business School Professor Michael Porter, is a business framework that attempts to open the door to deeper analysis of the competitor landscape, market, and industry. In the Harvard Business Review, Porter explains that the five forces are:
Threat of new entrants Threat of substitute products or services Bargaining power of suppliers Bargaining power of customers Jockeying for position among current competitors
These concepts allow companies to look at their industry holistically and understand where they fit into the competitive landscape.
SWOT Analysis
A SWOT analysis is a study performed by an organization to identify internal roadblocks and strengths in addition to any outside risk caused by other businesses. This easy-to-remember acronym stands for Strengths, Weaknesses, Opportunities, and Threats.
Core Competencies
A business’s core competencies are the internal resources and capabilities that allow differentiation from competitors and which ultimately grow the company. The idea of core competencies was first presented in a 1990 Harvard Business Review article and has since been used by businesses to grow revenue and expand their offerings.
Developing Your Understanding of Economic Concepts
If you’re looking to increase your knowledge, develop new skills, or advance your career in economics, the online course Economics for Managers could be a good fit for you. Taking a course in economics can prepare you to apply foundational concepts to your organization and set you up for success with more advanced economic concepts in the future.
Are you interested in learning more about key economic frameworks? Explore our eight-week course Economics for Managers, part of our Credential of Readiness (CORe) program, or other business essentials courses to build a strong foundation for success.
This post was updated on October 29, 2021. It was originally published on January 17, 2017.
Five elements of a good job
The recently updated unemployment rate of 3.9 percent from the Bureau of Labor Statistics continues a downward trend that began in 2010. By this standard, our economy looks good—most people seeking work have found employment. But as the economy heads toward full employment, researchers and policymakers must ask, are these all high-quality jobs?
In short: No. The nature of work is changing in a way that makes employees vulnerable. Employer-sponsored benefits are diminishing, low-wage jobs are increasing, and growth in contracting jobs has led to fewer employee protections. These trends could lead to a poorer, sicker, less-engaged workforce.
How can employers ensure they’re creating good jobs that benefit employees as well as their own bottom line? Many factors influence whether a position is considered a good job, but the following five top the list:
1. Livable wages
Livable wages allow employees to cover their basic needs, ensuring they can afford to live securely and don’t need to decide between paying the heating bill and buying groceries. If employees earn more, they are more likely to have economic security and save more for retirement. Adequate income influences worker and family health and financial security. These factors also influence child outcomes.
Providing livable wages also makes good business sense. One study found that an increase in wages and health benefits improved worker morale and effort and reduced wage inequality. And Walmart saw a reduction in employee turnover after increasing worker wages.
2. Mobility and growth opportunities within the company
Most training in the US is provided by businesses and employers, but lower-level workers do not have the same chances for getting that training. Opportunities for workers to improve their skills and advance in their careers are important for ensuring economic mobility. Jobs that offer promotion potential and training can benefit and motivate individual employees, and they can strengthen the workforce overall through human capital investment.
Employees with opportunities for advancement can also thrive in other ways. They tend to feel more satisfied with their workplace and are able to apply their new skills. With more training, they may be able to advance within their organization or in a new job. Firms with a longer career ladder and with significant wage growth better retain employees.
3. Workplace flexibility and schedule control
When employees have autonomy over their schedules, such as their number of hours and start and finish times, they are better able to manage commute times, other jobs, and care giving. And having adequate work hours is important for economic stability because workers can cover their basic needs.
This flexibility can accommodate personal and family responsibilities as well as erratic commutes that affect work hours. This flexibility can also help people keep and perform well in their jobs. Predictable and flexible scheduling may also reduce staff turnover for the employer, and schedule stability can increase profitability.
4. Benefits
Employer-provided benefits such as paid leave, health care, and retirement contributions create a web of supports for employees. But these benefits tend to be more common for higher-income workers. Jobs that offer these benefits promote employees’ productivity and labor force attachment as well as their health and well-being. Private health insurance is also correlated with longer life expectancy for adults as well as a range of child health outcomes.
Urban researchers have found that mothers who use paid leave are more likely to return to work than quit. This is especially true for women of color and less-educated women. Outcomes for children can also improve because of paid leave. New mothers with leave are more likely to breastfeed their infants, have less parental stress, and have healthier parent-child relationships.
Offering good benefits can also benefit the business. One study found that employer-provided benefits, among other factors, were linked to higher job satisfaction and reduced turnover.
5. Working conditions and safety
A safe and supportive workplace protects workers from injuries, physical harm, discrimination, and abuse. Government regulations and business standards affect employee health, employee job performance, and long-term earnings following injury.
Keeping employees from harm also makes business sense. If an employee is injured, they must be temporarily or permanently replaced by a new employee, raising costs for the business. This can slow productivity, reduce workplace morale, harm stakeholder value, and damage public opinion of the company.
Job quality matters for workers and businesses
Businesses can create more good jobs by paying decent wages, providing benefits to all workers, offering advancement opportunities, scheduling hours in advance so workers can plan accordingly, and ensuring a safe and healthy workplace. These factors can have positive effects for both workers and for the business. If employers fail to consider worker health and well-being, policy options can be a nudge. Job quality matters for workers, employers, and their families, and it should be a focus of the employment growth discussion.
Defence Economics
Defence Economics is a relatively new field within the discipline of Economics. It studies all aspects of the economics of war and peace. It embraces a wide range of topics in both macroeconomics and microeconomics. Theory, empirical and policy issues will be addressed within the broad area of defence and peace economics. Examples include the relationship between defence spending and growth, and the determinants of defence spending. The classic ‘guns versus butter’ choice problem will be addressed as well as assessments of the efficiency of a nation’s defence spending and its defence industries. Data problems and the challenge of measuring defence output and determining whether it is a worthwhile investment will be reviewed.
Other topics to be covered include the economics of military alliances; public goods; arms races: theory and evidence; arms markets; arms industries; arms exports; procurement policy; technical progress and spillovers; including efficiency implications of different types of contracts; cost-benefit and cost-effectiveness analysis; defence inflation.
Further analysis will embrace Defence Departments and the Armed Forces; military production functions; internal efficiency; military outsourcing; military and civilian personnel; human capital; training costs and returns to training; recruitment and retention; transferability of military skills and assets.
Peace economics and disarmament will assess peace as a public good; the economic benefits of peace and the costs of conflict; the economics of peace-keeping forces and collective action solutions. The myths and reality of disarmament will be identified; disarmament will be analysed as an investment process; peace dividends; conversion problems; case studies of war, conflict and peace; and policy options and their effectiveness.
There is also scope for the history of economic thought on war and peace and consideration of new ideas and challenges. Case study material is welcome. Examples include country case studies, project case studies and firm level studies.
Overall, defence economics deals with all aspects of the economics of war and conflicts, disarmament and peace.