In hard times, entrepreneurs can capitalise on consumer choice

In an economic downturn, price becomes very important for both businesses and consumers. Whereas you may have splashed out on something expensive a year ago, you'll think twice now. When budgets are squeezed, we have to make choices.

That thought process neatly illustrates the economic principle of opportunity cost. If I buy a new car for the business, what won't I be able to buy that I might need more? A car may present the right image to clients, but a new website could reach new markets. What is the trade-off between the two, and what is the value of the investment I am forced to reject? 

For economists, the calculation that you make about the opportunity cost of choosing one product or service over another is reflected in the price. And the price that people will pay for something determines the way in which the market works. So, if consumers demand websites rather than cars, then it makes sense for the market to allocate resources accordingly.

From the entrepreneur's perspective, the opportunity cost calculation is a chink in the consumer's armour. As consumers, we decide how to allocate our resources (in this case our income) on the basis of a complicated calculation in which price plays only a part. This provides the entrepreneur, intent on generating new markets, with a route to exploit errors of judgement. 

People are not perfect: they base purchasing decisions on irrational things such as taste or fashion, as well as price. For the entrepreneur, disastrous, costly choices like these are key to the decision-making process. Opportunity cost is a supply-side and a demand-side calculation for economists; its outcome in an entrepreneurial world is innovation.

Rebecca Harding is founder of Delta Economics.