Economics For Musicians pt. 1: The Basics

Posted by Faza on April 7, 2009 under Economics |

It has occured to me that a post (or several) on this subject may be in order. Musicians, after all, are not generally known for their good business-sense and economics is often considered a highly esoteric subject, of interest only to eggheads, such as myself. Many of the key concepts are fairly easy to grasp, however, and the knowledge thereof may help you identify manifestly bad advice when you see it.

This is by no means intended as a comprehensive lecture on the topic. Rather it is a primer on what you really should be aware of. Furthermore, I should point out that economics is not the same as business studies, which involve many more practical issues besides, such as accounting, marketing, human resource management and the like. I will not be covering those topics here. I will not tell you how to do your music business, but I do hope to influence how you think about your music business.

Note to other economists: I’ve tried to keep this fairly straightforward and perhaps even marginally fun to read for the uninitiated, so please go easy on me if you think I’m oversimplying the subject.

What is economics and what can it do for me?

There are tons of definitions of what economics is. Every economics textbook has one. I could quote one of them, but I’ve decided to be creative and provide my own:

Economics is a study of how people use limited resources to get things done.

Short, sweet and simple. In fact, I could try for an even shorter one:

Economics is a study of how people use limited resources to get things.

Which is also broadly correct.

While not exactly up to scientific standard, these definitions highlight an important feature of economics: regardless of whether we are aware of it or not, most of what we do in our day-to-day lives is economics. When we go down to the corner store for groceries, that’s economics. When we get the paycheck for our day-job, that’s economics. When we get paid (hopefully) for a gig or when someone (even more hopefully) buys our recordings, that’s also economics. As for the limited resources bit, we know all about that, don’t we? What with the recession and all. Looking at one’s wallet tends to be depressing these days.

Fine and dandy, says you, but since I’ve been doing it all this time without studying it, why should I do so now? For one thing, economics - like most sciences - strives to explain how our world works (and sometimes why). Understanding the processes we participate in helps us adjust to them and perhaps even swing them in our favour. If you are a musician who wants to make money playing original music, chances are you’ll have to take matters into your own hands. That means you become an active participant in the market and you could do worse than learn how it works. At the very least, you’ll know who to blame if it all goes wrong (more often than not this will be you, but not always).

Another reason to have at least a basic grasp of economics is as defence against everything from bad advice to bad business deals. Unless you equip yourself with some critical facility, chances are you are going to be had by someone who has a better grasp of where the money goes or at least pretends to. This is especially true today, since no one really has any idea of how the market for music should function on the Internet. Beware of people who say they do - they are probably giving you loony advice, but you have to be able to discern when it is loony and why. Worse still are the people who want to make money on the Internet, with the help of your music. How can you tell if you’re getting a good deal? I guess you know what my answer is.

Basic terms and concepts

I thought I’d start with a list of the basic economic ideas that we’ll be looking at, with a brief explanation for each. In later installments, we’ll be examining each one of them in detail and we’ll see how they pertain to our functioning as muscians.

Demand - In short, this is how many people want our product. More specifically, it is the quantity (expressed as the number of units, for example) that customers are willing to buy at a given price. If we view each price, together with the quantity demanded, as a point on a graph, we will get what is known as a demand curve (and we’ll be looking at one very soon).

Supply - This, on the other hand, is the quantity of product producers are willing to sell at a given price. Individual price/quantity points on a graph map out a supply curve for the product.

Costs - Like it says on the tin. This is the amount of money required for a business to operate. For us musicians, it basically means the cash we have to shell out to continue making music (and making it available). Naturally, the money to cover the costs needs to come from someplace, which is how we come to…

Revenue - This is the amount of money a business gets from selling its product, during a given period. Real easy to calculate: multiply the quantity sold by the price at which you sold it and presto!

Profit/Loss - After you’ve done something for a while, it’s time to evaluate how you’ve done. Subtract the costs from your revenue, cross your fingers and if you’re lucky, you’ve made a profit - you’ve managed to cover your costs and have something extra for your trouble. More often than not, you’ll be looking at a loss (possibly a substantial one, if your name happens to be YouTube). This means you’re going to have to look for ways to cover your costs from other sources, possibly going into debt (or you start getting funny ideas, such as that the people who you owe money to don’t really deserve it). All in all, you can count yourself lucky if you break-even, meaning your revenue was just enough to cover your costs. You’ve made nothing, but you haven’t lost anything either.

Market - This is where supply meets demand and vice versa. Rather than an actual place (which tends to be the first thing we think of when we hear the term) it something of an abstract concept, used to denote the interaction of suppliers and customers trading in a given good and the results of all this trading. In fact, it is a…

Model - This is a tool we use to reduce an incredibly complex real-life interaction of many diverse elements (such as people) to something understandable by humans (or, at least, economists). Mathematics are usually involved. Demand and supply are a model, as is the market (as we’ve already mentioned). It is important to remember that a model does not tell us what actually happens in real life. We create a model in order to explain the evidence we have observed, usually making a number of assumptions in order to come up with something we can work with. We can often use a model to predict what will happen, but the accuracy of the prediction will greatly depend on the accuracy of the model, primarily the assumptions.

One assumption that comes up as a matter of course is “all other things being equal” (or ceteris paribus if you like dropping Gratuitous Latin in conversation). What that means that we assume that the only thing that changes is the one we’re looking at right now. This assumption is crucial, because unless you eliminate other possible causes, you cannot draw any conclusions from the results.

This is by no means an exhaustive list and I will be adding to it as need arises in future posts.

The Business

Loosely defined, a business is an individual or organisation engaged in providing a good or service to customers, with the aim of making a profit. Therefore, you are only doing business, if you charge money for your music-related activities in any way, shape or form. Once you start doing that, you’ll have to contend with how much demand there is for your music, how much of it you can supply, what price you can charge for its various forms (recordings, concerts or whatever), how much it is going to cost you and how much money you can make doing it. Simple, no?

Classical economic theory assumes that a business is a profit-maximiser, meaning that it will try to make the biggest profit. This really isn’t the case these days (and I doubt it ever was). The primary goal for most businesses is sustainability - being able to continue doing what they do. If you’re struggling to keep your musical career afloat, you should be right at home with the idea. Those businesses that are lucky enough to be making a profit, might rather opt for profit satisficing (nasty word) - making enough, but without a major drive to make more. Also, a profitable business might be aiming for growth and this is another thing that should ring familiar to anyone secretly hoping for the big time.

So now you know the lie of the land and we have a course mapped out. The next post will focus on demand and what economic theory has to say about how it works.