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HBX Business Blog

5 Economic Relationships You Need to Know - Part 1

Posted by Patrick Healy on January 28, 2016 at 8:38 AM


What do you think of when you hear the word “economics” or “finance?” For many, words like these bring to mind complicated formulas and jargon, men in suits making irresponsible decisions with other people’s money, or bad memories of supply and demand graphs from college.

Fair enough. But economics and finance don’t need to be difficult. And you certainly don’t need to know a lot about either topic for you or your business to benefit greatly from them. Indeed, as a manager, employee, or policymaker, even a basic knowledge of economics and finance can be enough for you to make informed decisions that can result in increased profitability, smarter investment decisions, and better public policy.

Here’s a list of some key economic relationships for a business owner or policymaker to remember when making decisions:

  1. Price Up, Demand Down: This relationship is the foundation behind those pesky demand curves you may have had to draw in Econ 101, but is absolutely necessary for any business to understand in order to make money. Luckily, it’s pretty easy to comprehend, so we can skip the graphs altogether. Here’s the chase: when a business increases prices, it will almost always see sales for its product or service fall. This is because consumers prefer to pay less for something than more for it (but you probably didn’t need to be told that), so fewer people will be able to afford the good. Price up, demand down. It’s common sense.
  1. Price Up, Supply Up: This is the flipside to the previous relationship. When prices go up, consumers demand less, but, boy, would businesses sure like to supply more. Why would they not? If the product or service a business is supplying can command a higher price, it’s in the business’ best interest to supply more of it to make more revenue. So, price up, supply up. Like demand, its incentives at work here too.
Check out part 2 of our list here!

Topics: Business Fundamentals, HBX CORe, HBX Insights