What is needed to create wealth? Within the marketplace, there are many resources that go into the production (input) of goods and services. These resources can be grouped into four categories. These categories are land, labor, capital, and entrepreneurial ability. The land category consists of not just land, but all natural resources, water and air. Labor is all the work that is performed by man. Capital is industrial machines and buildings, not financial capital (money is not capital by this definition). Finally, there is a special resource called entrepreneurial ability.
It is the entrepreneur that organizes and arranges the use of land, labor, and capital to create an output demanded by the marketplace. It is the entrepreneur’s responsibility to decide on what amounts of each resource to use and then use those resources efficiently to create a product or service that is valued higher by the marketplace than the value of the resource inputs. The Law All Entrepreneurs’ Must Understand The second concept that is essential for all entrepreneurs to grasp is that of supply and demand.
To determine this equilibrium price and quantity of widgets, let’s put the demand and the supply curves together on the same graph. Now, if demand increases, the price and quantity supplied will also increase. If supply increases, perhaps due to a new technological innovation, widgets will be less scarce and the price will go down and output will go up. These are the laws of supply and demand. There are three important lessons which each entrepreneur has to know when he is starting his own business Lesson One: How to Price Your Products
If you charge too much you may make a large per product profit but not make many sales. Vice versa, if you charge too little you may make many sales but little profit or perhaps a loss. You likely will not have the resources to hire a team of Ph. D’s to do elasticity and econometric studies to determine the exact point, but you can come close through trial and error meaning that to find the price that will maximize revenue, you will have to experiment.
Test different price points and see what the reaction is on sales, total revenue, and net profit. Or you can set the price by seeing what your competitors are charging. Lesson Two: Sell What the Market Demands The law of supply and demand holds true is all situations and can often be cruel to those who do not abide by it. Before you begin your business, make sure you take time to determine the approximate demand for what you will be selling in the marketplace.
If you don’t you may find yourself out of business, not able to sell your product at the price your must in order to make a profit. Ask yourself if there is a need? What problems does your product or service solve? How will you differentiate yourself from all the competitors doing the same thing? Lesson Three: Supply and Demand Works in Factor Markets as well as Goods Markets While the models above use the example of a good, the widget, the law of supply and demand is equally applicable to factor markets, that is, the market for employees and workers.
The difference is that supply is supply of workers and demand is demand for workers. As the business owner, you are no longer the provider, but rather, the consumer of labor. If the supply for labor in your area is low, you will have to pay more to attract the quantity and quality of employees you need to build your business. Similarly, if there are many employers in your area, there will be more choices for workers in the area and thus wages will be driven higher.