Economics for Entrepreneurs 101: 5 basic concepts

Starting a company or one’s own enterprise is hard for lots of reasons. But you don’t have to go it alone. One of the best ways to minimize the risk is to gather information. Usually, that’s stuff about market size and fit, potential customer receptivity, and the regulatory environment you’ll be operating in. But you also need to know your basic economics.

While very few people can claim to have mastered economics, one only really needs a good grasp of the basics. To help, we’ve compiled the following five (by no means exhaustive) basic concepts to provide you with an introduction.

So here they are – five basic concepts in economics:

1. Cost-benefit analysis (CBA)

CBA is a good way of developing a reliable approach to making decisions. A CBA approach can help entrepreneurs understand the clear cost associated with a set of choices. Basically, the question becomes, “if I take this course of action, how much will it cost me versus how much will I make?”

For example, the manager of a popular restaurant has to a choice to make about whether to upgrade the restaurant’s interior décor. Is it worth it? Lots of things may contribute to the decision, like whether most customers sit down to eat or whether they order out. A systematic cost-benefit analysis can help the manager make a clear choice.

2. Opportunity cost

Opportunity cost is related to CBA, but not quite the same thing. Basically, there are economic costs associated with the choices one makes, and some of those costs are best described as the cost associated with not making another choice. Every choice you makes means you’re making a choice about something else too. If you choose red, you’re not choosing blue. And not choosing blue is part of the cost that one has to consider when choosing red.