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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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.
