How The Principles Of Economics Can Help You Succeed In Entrepreneurship – Entrepreneurship is the act of starting up a business venture with the aim of minimizing cost and maximizing profit. As an entrepreneur, you have sat down and analyzed different ways of adding value to your society and starting up a business enterprise whether it is through physical contact with your prospective consumers or through the internet. Entrepreneurs take the risk of putting their resources into a venture that is uncertain. These questions might pop-up:
- What if it fails?
- What if everything becomes a mirage?
- What if in the end, I fall back to square zero?
This is where the knowledge of economics becomes necessary. This is where you will have to apply the principles of studying your environment and the behavior of the individuals around you. Your resources are scarce compared to your needs, wants and goals. You need to be critical and careful in the venture you put your resources into as a prospective entrepreneur and how to allocate and utilize the scarce resources efficiently so as to attain your goal and fulfill your dream. Your ability to know how to prioritize and how human behavior works, will guide you in your quest and career.
In this article, we will be dividing our discussion into:
- What is Entrepreneurship?
- What is economics?
- 5 essential principles of economics you should know to succeed in entrepreneurship
WHAT IS ENTREPRENEURSHIP?
Entrepreneurship is the act of identifying business opportunities, acquiring and allocating the necessary resources in order to make use of the opportunities.
In the early 19th century, French Economist Jean- Bapstiste Say provided a broad definition of entrepreneurship, saying “entrepreneurship is the act of shifting economic resources out of an area of lower productivity; into an area of higher productivity and greater yield”.
Entrepreneurship entails the ability to take risk over and above the normal and desire to make wealth. The act of entrepreneurship helps to create wealth and also create jobs not only for the entrepreneur but for others also. As an entrepreneur, you become an employer of labor through your inventions and innovations. Entrepreneurship in some context can also mean the use of your skills to develop a means to be innovative and self- employed. Entrepreneurship is very important to individuals and the society at large. Some of the importance of entrepreneurship is highlighted below:
- Entrepreneurship promotes creativity.
- Entrepreneurship helps to create wealth and job opportunities.
- Entrepreneurship increases labor and workforce.
- Entrepreneurship spurs economic growth.
- Entrepreneurship helps to identify problems ad solve them.
- Entrepreneurship promotes self-development and community development.
- Entrepreneurship breeds innovation.
WHAT IS ECONOMICS?
As we all know that economics has numerous definitions by different economists. In this article, we will be looking at Adam Smith’s and Professor Lord Lionel .C. Robbins’ definitions of economics.
According to Adam Smith in his treatise “Wealth of Nations”, defined Economics as “an inquiry into the nature and causes of the wealth of nations”.
Another definition by Professor Lord Lionel .C. Robbins which is widely accepted because of its broad nature as it embraces every basic concept of economics and relates economics to human behavior. He defined economics as “a social science that studies human behavior as a relationship between ends and scarce means which have alternative uses”. In this definition, he made us understand that human wants are numerous and insatiable but the resources to satisfy them are limited. This is a real problem to everyone including entrepreneurs because they need resources like capital (physical and human assets) to start up their business venture. In economics, choice comes as a result of limited resources wanting to satisfy numerous wants. You cannot satisfy all your wants at the same time. You cannot produce all the commodities people need at the same time.
As an entrepreneur, choosing the right venture to open from the opportunities you have identified needs the knowledge of economics. Here, you get to know how to make rational decisions so as to minimize cost of starting up a business and maximize profit which is the aim of setting up a venture. Economics will make you understand that scarcity is the reason you need to be rational in making decisions so as to make optimal use of your available resources to get the best result. The resources can never be in abundance.
It is important for us to show the relationship between entrepreneurship and economics as they both have many things in common. Economics teaches you about allocating resources, managing finance, identifying opportunities (problems), preparing budget and many others and all this knowledge are needed by entrepreneurs to startup and also improve existing business ventures.
5 ESSENTIAL PRINCIPLES OF ECONOMICS YOU SHOULD KNOW TO SUCCEED IN ENTREPRENEURSHIP
If you have ever sat down to think of it, you would see that entrepreneurship has a lot to do with economics and economics is needed to succeed in entrepreneurship. An entrepreneur identifies opportunities in his or her environment and deploys his available resources which can be (physical or human capital) to make use of the opportunities.
The introduction of the capitalist economy created room for the involvement of private individuals in the production, distribution of goods and services. Private individuals now have the privilege to own properties and engage in productive activities to create wealth and job opportunities. In this article, I highlighted five principles of economics that can be applied in order to succeed in entrepreneurship.
- THE PRINCIPLE OF THE BASIC ECONOMIC PROBLEMS
Entrepreneurs are mostly faced with the problem of what to produce, how to produce, for whom to produce and how to allocate and use their resources efficiently. This basic economic problem is a drive to identifying opportunities. After asking yourself the questions as a prospective entrepreneur, you tend to analyze your environment to determine the wants and needs of the people, remember that economics is a social science that studies human behavior. Your study of your environment and the needs of the people will lead you to creating a venture that will meet the pressing needs of the people.
In trying to meet these needs, you will also consider how to produce the goods and services considering the technique of production, cost of production, the nearness to the raw materials and so on. After answering the question of how to produce the goods, you have to be careful not to produce goods that the consumers in the environment do not need or goods that cannot satisfy their wants. You have to assess for whom you are producing, understand the level of income of the consumers as this will help you create a long-lasting venture. It is also important to know how to allocate your available resources that is making optimum use of the factors of production so as to achieve higher output at minimum or reasonable cost.
Understanding the principles of the basic economic problems will point you in the right direction and kick-start your journey into entrepreneurship and also make you excel.
- THE PRINCIPLE OF PRODUCTION POSSIBILITY CURVE AND OPPORTUNITY COST
The production possibility curve shows the relationship and combination of two or more commodities that can be produced with the available resources and level of technology. In understanding production possibility curve, you need to also have knowledge of opportunity cost.
Since entrepreneurs are faced with the problem of what to produce, they will choose from alternatives and making the right choice lies in his comparative cost advantage. As an entrepreneur, you will have to think of the product that you can produce at a lesser cost and that will yield better output. You have to understand that your resources are limited and so you have to sacrifice the production of one product for another product that you have a comparative cost advantage. That is why for you to start up a business venture, you will have to prepare a business plan and feasibility studies that will show you the cost analysis and also your available resources. You cannot produce everything the people need at the same time because your resources are limited. So understanding the pressing needs of the people, your comparative cost advantage and the sacrifice you will have to make will point you in a direction to see the best product to produce at reasonable cost so as to maximize your profit which is the major aim of starting up a business venture.
- THE PRINCIPLE OF DEMAND AND SUPPLY
The ability for consumers to buy a particular commodity has a role to play in the decision an entrepreneur will make. Many firms do a survey so as know the product that is in high demand in the market as this will enable them know what to produce and for whom to produce.
As an entrepreneur, you should understand the principles of demand and supply and the elasticity of demand and supply. A slight change in the price can make consumers stop purchasing a product or increase their purchasing power. The knowledge of demand and supply will help fix prices on product you will be producing and also in improving the quality of your product. This knowledge will also help prospective entrepreneurs know where to shift their resources and how to do it. When the demand for a particular type of product or service is high and you are faced with the problem of what to produce or service to render, you can channel your resources and efforts into producing that commodity or service knowing that it is in high demand with a corresponding low supply. So it is left for you to produce in large quantities so as to meet up with demand and make profit. The principle of demand and supply will make you understand some factors that make people change their demand for some product and increase their demand for others. Some of the factors can be;
- Price of the product
- Price of other products that are close substitutes
- Change in fashion or what’s trending
- Change in season
- Festive period
- Income of the consumers
- Health status
- Durability of the product
All these factors will help you place your level of production and also channel your productive resources efficiently.
- THE PRINCIPLE OF ECONOMIC SYSTEM
The type of economic system will determine the level of entrepreneurship that will prevail in the particular area. For a country that practices the socialist type of economy; where the government owns, controls and manages the means of production and distribution in a country, the activities of entrepreneurs will be limited because the means of production and the ability to produce and distribute goods and services is in the hands of the government. Entrepreneurship is not encouraged in this system.
On the other hand, a country that practices a capitalist economy creates an avenue or opportunity for entrepreneurs to make use of their resources to create utility. In this economy, the means of production and distribution are in the hands of the private individuals therefore their innovations and inventions can be showcased and profit can be made. Entrepreneurship will surely thrive in the capitalist economy as these individuals fix the prices of their products. So as a prospective entrepreneur, you should understand the type of economic system operated in your society and how to make value and create wealth.
“I am a capitalist by conviction and profession. I believe the best economic system is one that rewards entrepreneurship and risk taking, maximizes consumer choice, uses market to allocate scarce resources and minimizes the regulatory burden on business” – Gary Hamel
- THE PRINCIPLE OF MARKET AND THE CHANNEL OF DISTRIBUTION
The channel or means of coming in contact with your prospective consumers should be taken into consideration as an entrepreneur that wants to make profit. Let us take a look at Jeff Bezos (Amazon), he has used the internet as a system to reach his consumers and has made every item available through his company, Amazon. He started from an online book store and now he sells varieties of consumer goods because he understands the market and his consumers. Now his company is recognized as the largest online shopping retailer in the world.
The knowledge of the perfect and imperfect market is very important. The perfect market is a market where there are many sellers and buyers and they cannot influence the prices of goods and services. This market is a competitive market as prices are determined by the interplay of demand and supply. The imperfect market on the other hand, is a market where the sellers or buyers can influence the prices of goods and services like monopoly and duopoly.
As an entrepreneur, it is imperative to understand the market, the type of market to operate in and also the channels of distributing your products or services and communicating with your prospective consumers. This will help you grow your venture and weather through challenges.
In a bid to draw the curtain, economics is very essential in entrepreneurship as a vast knowledge of it will set you on the right track in decision making and making optimum use of your available resources. This is the reason most of the entrepreneurship definitions are proposed by economist as they seem to have a broad knowledge of production, distribution, market and trade, wealth creation and efficient use of resources.
You should also understand that entrepreneurship accommodates different schools of thought. It is not limited to economics or commercial field of study. Whichever school of thought you find yourself, (science, art, humanities, law, engineering), your ability to be creative and create inventions and innovations in your field or anywhere in a bid to create wealth and start up a business venture, makes you an entrepreneur. See the likes of Bill Gates, Mark Zuckerberg, Jeff Bezos, Steve Jobs and many others. Every one of them are entrepreneurs from different school of thoughts and field of study but they identified opportunities around them, deployed and used their available resources to meet the requirement and in that process, started a business venture.
“One of the myths you see in entrepreneurship is that people have this dream one night, wake up the next morning and start building. It is actually much more of an iterative process” – John Collison
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