The executive is thinking about the economy.
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Many business leaders have taken at least one economics course, but most have taught the wrong part of economics, at least the wrong one for someone running a company. A small focus on the business impacts of economic analysis can help an executive or small business better understand how the external environment affects sales and costs.
Much of the teaching of economics ranges from theory to the implications of that theory on public policy. Thus, macroeconomics is getting involved in fiscal and monetary policy in order to stabilize the economy. Microeconomics is getting involved in discussions about rent control, the minimum wage and antitrust policy. The focus on politics is strange given that few students will become policy makers, but many will work for businesses or nonprofits that have to deal with fluctuating incomes and costs.
There is a wealth of knowledge that can help in business decisions. On the macroeconomic side, some sectors are more sensitive to business cycles (goods, for example), while others are less sensitive (health care). Some industries are recovering earlier after the recession (housing) and some later (business equipment). It would be good for business leaders to study past cycles in their industries, considering the degree of cyclicality and the time of increase and decrease of sales.
Microeconomic supply and demand theory is well understood by most experienced business people, but resilience is key in practical situations. Take, for example, the increase in oil prices. The offer does not seem to react to higher prices as shown by the sketches on the board. But most economics courses deal with the question of how long it takes for supply and demand to balance. It turns out that the demand for oil can grow rapidly when revenues and industrial production grow. However, it takes many years to explore, drill and build pipelines to increase oil supply. Meanwhile, prices are rising, only to fall after a new offer comes up.
Economics teaches the importance of decision-making on the margins. The old paradox of why diamonds are more valuable than water, despite being less necessary for life, was explained many years ago by reshaping the issue as the value of one extra diamond compared to one extra gallon of water. Similarly, business decisions should not be reduced to simplistic issues such as print advertising or online advertising. Instead, good marketing analysts compare the value of an extra dollar of print advertising with the value of an extra dollar of online advertising.
Scarcity is at the core of the whole subject of economics. Management gurus give lectures at conferences on many things that business leaders need to add to their to-do lists. But managerial time is a scarce resource, often the most critical of a company’s scarce resources. Allocating that time - for the boss as well as for the first level managers - makes the difference between success and failure. Scarcity in its many consequences is a small part of the economy that plays a huge role.
Most of the economy that business leaders need is taught in the Principles of Economics. Understanding the subject well enough to pass the final exam is just the beginning. A business manager must be able to apply basic principles immediately and intuitively. Advanced courses are valuable in strengthening basic principles.
Many professors of economics are rightly proud of the beneficial impact of their profession on economic policy sometimes in the past, as well as the potential benefits of better policy in the future. But most students will not become policy makers; instead, they will be involved in business or other enterprises that are subject to market forces (such as non-profit organizations and local governments). Applying economics to these issues will help them in their careers, and will also help the entire economy through more efficient use of resources.