In college, I hated microeconomics. I didn’t find it applicable to the real world.
For example, economists concern themselves with supply and demand in commodities for things like “fake leather.” Marketers, on the other hand, can take that same fake leather, call it “vegan leather” and completely change the demand curve.
But as I developed more and more as a growth marketer, I found myself frequently going back to concepts in microeconomics.
Why? As growth marketers, understanding basic economic principles and terminology helps us move faster and think more quantitatively.
If you’re familiar with the basic concepts of microeconomics such as opportunity cost, inferior/luxury/normal goods, and diminishing returns, you can safely skip this post.
In simple terms, supply is the amount of a product available, and demand is how much people want that product. For example, when Apple releases a new iPhone model demand is high and supply is limited, driving up prices
This is the cost of choosing one option over another. For example, let’s say you make $200k/year and decide If you want to quit your cushy tech job to open up a bakery.
From an economics lens, your cost isn’t just what’s required to start the bakery–it’s also the $200k that you will forego by quitting your job.
If you’re new to opportunity costs, this concept might not seem intuitive from the get go, but it’s incredibly useful when weighing various decisions at your disposal.
Risk is the uncertainty that comes with taking a particular action. For example, Facebook exposed themselves to a lot of risk by expanding their business into the “meta” world.
Arbitrage is the practice of taking advantage of price differences in different markets. For instance, if bitcoin were priced significantly differently in two different exchanges, you buy it in the cheaper exchange then sell it for a premium at the other one. This is arbitrage.
Utility is the satisfaction or happiness a consumer gets from using a product or service. Think of it as a type of universal happiness “points.” The amount of utility received might vary between different people. For example, music lovers will receive more utility from a Spotify subscription than people who don’t really listen to music.
This concept suggests that as you invest more resources into something, the benefits you receive may decrease. As a restaurant adds more advertising on Facebook, they may initially see an increase in customers. However, at some point, additional ads may have little effect on attracting new patrons.
The additional benefit received from using one more unit of a product or service. For instance, the marginal benefit of adding one more employee to your team is the extra work they can accomplish. For example, when Amazon adds one more delivery driver to its fleet, the marginal benefit is the extra packages that can be delivered in a timely manner.
Similar to marginal benefit, this is the cost that a company incurs by producing one more unit of a product or service. For example, a shoe company may have spent millions of dollars to start a factory, but their “marginal cost” of production may only be the cost of one shoe.
Network effects occur when a product or service becomes more valuable as more people use it.
For example, there was probably nil value for whoever owned first fax machine. What about the first two fax machines? That’s a bit better, but they could only fax each other. How about the first five fax machines? Now there’s 10 pairs of people who can fax each other.
In many ways, network effects are the opposite of diminishing returns.
Economies of scale occur when there are cost advantages that come from producing larger quantities of a product. For example, Coca-Cola benefits from economies of scale by producing massive quantities of beverages, reducing the average cost per unit and increasing profit margins.
This is the phenomenon that occurs when cost advantages arise due to producing a larger variety of products. For example, Amazon leverages economics of scope by offering a wide variety of products and services, attracting more customers and using its resources more efficiently.
This is the difference between the amount a producer is willing to accept for a product and the amount they actually receive. If a company is willing to sell a product for $10 but manages to sell it for $15, the producer surplus is $5.
The difference between the maximum amount a consumer is willing to pay for a product and the amount they actually pay. If a consumer is willing to pay $50 for a product but buys it for $40, the consumer surplus is $10.
Products that have a higher demand as income increases. These goods are often seen as status symbols and are not considered essential. Examples include high-end cars, designer clothes, and expensive watches.
Products that have a lower demand as income increases. These goods are often replaced by higher-quality alternatives as people's income rises. Examples include ramen, generic brands, public transportation, and junk food.
Products that are indistinguishable from one another, regardless of the producer. They are often traded in bulk, and their prices are determined by supply and demand. Examples include oil, gold, and wheat.
Much of economics is impractical textbook filler. But as a growth marketer, you’re very likely to encounter the concepts above.
For example, much of an e-commerce discount strategy will revolve around producer surplus. Or, if you’re deciding which platform to allocate your ads budget towards, opportunity cost definitely comes into play.
We’ll be referring to the concepts above at various times in order to fast forward the learning process.