The Advantages of Understanding Economics


Affectionately nicknamed "the dismal science," the field of economics tries to make sense of what people choose to do with their resources, especially in terms of money. Studying economics is important for bankers and CEOs for obvious reasons, but the field also is important for small business owners and managers.

Informed Citizenship

The virtue of being an informed citizen of a democracy is one of the biggest reasons a solid foundation in economics is important. Most of the challenges governments tackle are, at their core, economic problems. Questions of how high taxes should be, which industries -- if any -- should be subsidized, and who should pay to take care of the least well-off members of society all are economic questions. That's why Forbes suggests that every voter should understand at least 10 important aspects of economics before filling out a ballot.

Many economic policies can be difficult to understand. For example, the Wall Street Journal notes that many struggle to understand the difference between marginal, effective and average tax rates. If voters don't understand these core economic concepts, it's difficult for them to make smart choices about who to elect and what to support.

Better Financial Strategies for Businesses

Whether you're making decisions about your future career or guiding a business toward profitability, understanding economic theory can help you be wiser and exercise better judgement.

Managers and business owners need a solid understanding of how financial markets work to make optimal decisions about borrowing money. Owners who understand how interest rates on bonds typically move, for example, can save money by buying that new office space when rates are low or holding off upgrading the fleet of company cars when rates are high. Similarly, understanding concepts like depreciation and market capitalization can help help companies devise smarter financial forecasts.

Affects Basic Business Decisions

A solid understanding of economics isn't just useful for business finances -- it also can help businesses serve their customers more effectively. For example, studying behavioral economics might help companies understand how consumers go about making purchases.

A famous behavioral economics study pointed out that most people are happy to drive way across town to save $10 on a $20 grocery bill. Very few people, however, are willing to drive across town to save $10 on the purchase of a $2,000 television. Economists point out that this is irrational, since the savings are equally valuable either way. Studying behavioral economics can thus give your business an edge by helping you set price points or find a better marketing strategy.

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