What business leaders need to know about the economy

Many business leaders have taken at least one economics course, but most have been taught the wrong part of economics, at least the wrong one for someone who runs a company. A little focus on the effects of economic analysis on business can help a small business manager or owner better understand how the external environment affects sales and costs.

Much of the teaching of economics goes from theory to the implications of this theory for public policy. So macroeconomics is involved in fiscal and monetary policy to stabilize the economy. Microeconomics is involved in discussions on rent control, the minimum wage and antitrust policy. The focus on politics is strange, given that few students will become politicians, but many will work for companies or non-profit organizations that have to deal with revenue and expenditure fluctuations.

There is a wide range of knowledge that can help in making business decisions. On the macroeconomic side, some sectors are more sensitive to business cycles (eg goods) and others are less sensitive (healthcare). Some industries are recovering earlier after the recession (housing) and some later (business equipment). Business leaders would do well to study past cycles in their industries by looking at the degree of cyclicality and the timing of increasing and declining sales.

The microeconomic theory of supply and demand is well understood by most experienced businessmen, but resilience is crucial in practical situations. Take, for example, the increase in oil prices. It seems that the supply does not correspond to the higher prices, as the sketches on the blackboard show. But most economics courses deal with the question of how long it takes for supply and demand to balance. It turns out that demand for oil can grow rapidly as incomes and industrial production rise. However, the increase in oil supplies takes many years of exploration, drilling and construction of pipelines. Meanwhile, prices are rising, only to fall once the new supply comes online.

Economics teaches the importance of decision-making on the periphery. The old paradox of why diamonds are more valuable than water, even though they are less necessary for life, was explained years ago by restructuring the issue as the value of one extra diamond compared to one extra gallon of water. Similarly, business decisions should not be transferred to a simple issue such as print advertising or online advertising. Instead, good marketing analysts compare the value of an extra dollar in print advertising to the value of an extra dollar in online advertising.

Shortage is at the heart of the whole subject of economics. Management gurus give lectures at conferences on the many things that business leaders need to add to their to-do lists. But the CEO’s time is a scarce resource, often the most critical of the company’s scarce resources. The distribution of this time – for the boss, as well as for first-level managers – makes the difference between success and failure. The shortage in its many branches is a small part of the economy that plays a huge role.

Most of the economics that business leaders need is taught in the Principles of Economics. Understanding the subject well enough to pass a final exam is just the beginning. The business manager must be able to apply the basic principles immediately and intuitively. Advanced courses are valuable for strengthening basic principles.

Many economics professors are rightly proud of the beneficial impact of their profession on economic policy sometimes in the past, as well as the potential benefits of better policy in the future. But most students will not become politicians; instead, they will participate in business or other enterprises subordinated to market forces (such as non-profit organizations and local authorities). Applying the economy to these issues will help them in their careers, and will also help the economy as a whole by using resources more efficiently.

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