Economics and How It Applies to Small Businesses

When starting any new business, entrepreneurs should look at the economics that is involved in the operation of the business.  Whether it is a storefront department store or an online business it is essential to determine the costs involved.  Make a list of expenses including cost of supplies, marketing, employee wages, overhead- electricity, rent, utilities and any operating expense.  Then set aside income to cover your business for a whole year.  This income will help to defer unknown expenses that might occur and help establish you as a new entrepreneur. 

Economics is the social science that studies and interprets distribution, production of products and consumption of goods and services.  If you are going to be a successful entity your sales should outweigh your total expenses. 

The most fundamental concept of economics is Supply and Demand.  This means that the demand for a product should outweigh expenses to supply the product. Factors that influence this are:

a. cost of production

b. advertising cost

c. overhead expenses

d. customer demand

e. product price- which includes the law of demand.  The higher the cost the less demand by customers.  This should be a focal point in deciding a sellling price.


Recession hurts the economy and therefore many small businesses are forced to close.  They are usually the first ones affected by the recession.  There are several reasons for this but some are due to overall inflation, supply shortages and job losses.


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