Whether we like it or not, we are all affected by economics, especially businesses. The principles of supply and demand, elasticity and market structure all play a role in the decisions business need to make. Understanding the basics economics helps you as a business to grow and reach new levels.

The Basics

Economics is mainly concerned with one thing. That is, the distribution of scarce resources—in other words, supply and demand. Put simply business are supplying goods and services while consumers demand them. Where these 2 quantities intersect is equilibrium. This equilibrium determines the maximum price consumers are willing to pay the producer for a given quantity of a good or service.

Why is this important?

Businesses want to charge the most they can for their product. This is done when demand exceeds supply. But business can’t simply lower the quantity of a product they sell and charge more for it. Businesses set their prices based on how the consumers react.

Think about it

If you produce 100 bottles of water and sell each one of a $1 and you sell all of them, you made $100 dollars. Suppose now that you instead of having 100 bottles of water, you have 50 so you decide to sell each for $2. Unless you have some sort of monopoly power, you’re not going to sell very many, because less people are willing to pay $2 dollars for something they can get from another vender for $1. The way you make more money is by increasing how badly people want bottles of water, perhaps advertising how good it is or making it look like it’s worth more than $1.

Now that we have the basics out of the way, we need to look at market structure. We live in a world dominated by monopolistic competition.

Mono what?

Monopolistic competition is a market structure characterized by a few things.

1. Lots of independent firms
2. Differentiated product (these products may be similar, but they aren’t exactly the same)
3. Producers are searching for the maximum price they can sell their product for (this is where design comes in)

This market structure is the one currently in use. So why is all this important? Well knowing this and being able to explain in it to a client answers question “why is design important?”

Design can make a product seem more valuable, allowing producers to sell more of it at a higher price. Don’t believe me? Look at these bottles:

Which do you think is worth more? I don’t know about you, but I would go with the one on the right. It’s more colorful and inviting. It grabs your attention and commands it more than the one on the left. That is what design does. It grabs your attention, focuses it and makes you grab it. Design helps consumers differentiate between a “quality” product and one that is…well not as a great.

Wrap up

So to wrap up, design and marketing are a critical part of today’s modern economy. Not spending money on how your product or service is presented is like committing economic suicide.

Remember you would never go to a store to buy a rotten apple; you buy the one that looks best.