Yesterday’s podcast shared the conversation that Dr. Jeni Al Bahrani, Sarah Bosse, and I had on this topic. But I wanted to take the time to weave in more entrepreneurship topics and how they relate to economics.
If I were to teach entrepreneurship students economics that they can apply, or if I wanted to weave in entrepreneurship-focused examples in my intro courses, here are some areas I would focus on.
Scarcity, choice, and opportunity cost. Every entrepreneur’s first question is “should I do this?” You can only ask that question if you have options and a choice available. For most, the decision is to found a new venture or take a salaried job. Your choice depends on preferences, budget constraints, and resource availability. Risk preferences are often overlooked when making this decision.
Supply, demand, and elasticity. In the conversation with Sarah, we learned more about TAM/SAM/SOM. Those are critical potential consumer segments. Understanding those segments helps you define your consumer better, understand their elasticity, and set your prices accordingly. This is where willingness to pay shows up and consumer surplus is defined. A startup’s pricing strategy is to capture as much surplus as the market structure allows.
Marginal analysis (MR = MC). How much to produce, when to hire the next employee, when to add another unit of capacity. These are all textbook examples of marginal analysis. Not understanding marginal analysis is how founders end up overhiring or overproducing.
Cost structure and break-even analysis. These topics help new firms understand how to scale and keep costs under control. COGS in entrepreneurship are cost curves in economics. Understanding the difference between fixed and variable costs helps entrepreneurs understand where their money is going. The biggest question is around scaling your business; for that, you need to understand economies of scale (and diseconomies of scale), which will help you see why some ventures should stay small, while others need to scale fast to survive.
Market structure and competitive strategy. Management and entrepreneurship love Porter’s Five Forces. For economists, that’s applied market-structure theory.
barriers to entry,
number of competitors,
product differentiation.
Strategic interaction with competitors
Relationship with input providers
These are all the foundations of industrial organization in economics.
Factors of production. Land, labor, capital, and entrepreneurship itself as the fourth factor. This is the theoretical justification for why entrepreneurs earn a return distinct from wages and rents. Fundraising (capital), hiring (labor), and site/lease decisions (land) map straight onto it. As I mentioned in the podcast, the equation is simple: take inputs and return output; make sure the value of the output is higher than the value of the inputs!
Information asymmetry and signaling. Why startups obsess over branding, warranties, reviews, and credentials — these are all signaling and screening mechanisms. The company that stands out builds trust and avoids the lemons problem Akerlof described. Investors cannot identify the good investment from the bad one; they look for signals to approximate true risk. Also, Two-sided marketplaces (Airbnb, Uber) live or die on solving adverse selection. Their venture relies on solving an incomplete information problem.
Price discrimination. Freemium tiers, student discounts, enterprise vs. self-serve pricing — all textbook first/second/third-degree price discrimination, taught in intro as a monopoly-power topic and are relevant for entrepreneurship education.
Time value of money and interest rates. Cost of capital, discounting future cash flows, and why venture debt and equity carry different implicit “prices.” This is a great discussion in intro to macro when discussing loanable funds markets and interest rate implications to the overall economy. We hit at this in the podcast when discussing rising rates.
Behavioral economics. Anchoring, loss aversion, and framing effects show up constantly in both consumer marketing and founders’ own decision-making (the sunk cost fallacy keeping people in failing ventures too long).
Comparative advantage. Why founders outsource manufacturing, outsource accounting, or focus on one niche instead of doing everything in-house — straight from the trade/specialization chapter, just applied inside a firm instead of between countries.
As I write this, I’m excited about the opportunity to design a course on the economics of entrepreneurship. It would make for a great class.
What other topics do entrepreneurs need to learn?
