Economics concepts

Economics is the study of limited resources ($) in a world of unlimited choices;

There’s an assumption that people will make decisions based on their own self-interest;

  • Wants: All the things we need/want to pay for, from rent to Redbox;
  • Scarcity: Think if this as a sliding scale. More scarce = more expensive. For example:

Not at all scarce (candy, $); a little scarce (point-and-shoot cameras, $$); very scarce (Tesla Model S, $$$$$);

  • Command economy (socialism or communism): The government tells consumers how many TVs to make and how much they will cost;
  • Market economy (capitalist democracies): Consumers tell companies how many TVs to make and how much they will cost;
  • Choice: In a market economy, there’s always choice. Say you’re hungry – here are some choices:

1) Jones Hall on a meal plan; 2) Taco Bell with cash; 3) H-E-B with a credit card; 4) Go hungry!

  • Opportunity cost: The most-desired choice that you didn’t make. This sounds complex but it’s not. When you spend money or time on something, you didn’t spend it on something else. That’s the opportunity cost.

If you spent all weekend bingeing Netflix, you didn’t do homework – homework was your “opportunity cost”

Starbucks latte and cigarettes every day? Your opportunity cost was a study abroad you couldn’t afford;

  • Substitutes: A lot like choice, but broader – there’s always something else to spend money on;
  • Choice: “this car vs. that car”; Substitute: “this car vs. new clothes or a new cell phone or tuition”;
  • Demand: How much of a market there is for a product or service – how many people want it;
  • Supply: How much of a product or service is available;
  • Linear relationship: A 1-to-1 relationship: If you cut the price in half, you sell twice as much;
  • Elastic (nonlinear) relationship: Not a 1-to-1 relationship. Doubling a price might reduce demand 90% or 10%;
  • Substitute good: In this case, “good” means a product or service. Substitute means you own one until it wears out, like a computer, cellphone or car. You just own one; it’s expensive; you replace it with a new one;
  • Complementary good: This is a product or service that works with another good. The classic example of this is $20 razor blades to put in a $5 razor (that’s why the razor is cheap). In digital media, apps and music are complementary. You buy one phone (an expensive substitute good); but you may buy hundreds of songs or apps to go along with that phone – to “complement” it (complementary good). The concept of “complementary good” shows the genius of Apple’s iTunes, App Store and Google Play Store.

Remember, 3 “eras” of revenue:

1) Before you launch/Startup;

2) Subsistence and growth;

3) Profit and payback (eventually)

            -You’ll want to start small and cheap and build over time

Revenue sources:

  • Seed funding/Angel Investors (individuals; sharks)
  • Venture capital (investment houses, hedge funds, companies)
  • Incubators/Accelerators (private, government, Universities)

ALSO, UT Austin has the ATI, Austin Technology Incubator; we have STAR Park
  • Loans
  • Your own money
  • Friends/Family/Fools “FFF”
  • Other investors
  • Federal, state or municipal grants, loans, matching funds, etc.
  • Foundation money
  • Philanthropy
  • Events
  • Contracts (2 MIPPA contracts with Texas HHS to promote Medicare)
  • Equity – this is shares or part ownership of your idea/company
  • Clients/customers – maybe right away! CERTAINLY eventually

-Even nonprofits need to operate in the black

  • Crowdfunding

Here’s a quick look at the what share of funding supports new companies – keep in mind that this is ALL kinds of new companies, like restaurants, bars, food trucks… not digital companies:

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