Art Business 101: Economics of Art

In this series of Art Business 101 posts, I discuss economic concepts such as price, branding, and marketing as they relate to artists. I would be remiss, however, if I did not take the time to give you a broad overview of Economics itself. You need to understand the big picture, because you will then be equipped to see where your art business fits.

Economics 101

Economics is the study of wealth creation and wealth transfer. Wealth is created and transferred in two basic (but intertwined) ways:

  • capital investment
  • the production and consumption of goods and services

The second method of wealth creation is easy to understand. Most people sell something, be it goods, services, or some other form of labor, in exchange for money. They turn around and use that money to buy goods, services, or labor from other people. Thus, wealth is created and transferred between people.Dean drawing Ellie

None of that would be possible without the first method, capital investment. Before your job could exist, someone had the idea for your company. They used their own money (or a loan) to get it started, paying for your work space, your telephone line, your website, your tools and supplies, advertising, and whatever else was necessary to get the enterprise going. If stock in the company is publicly traded, then shareholders provided the capital. If you own your own business, then it was you that set the stage. All of these investors participated not to lose money, but because they anticipated earning back everything they spent and more.

In a nutshell, capital investment is the commitment of money to a particular enterprise with the promise that profit will come back to you. This return on investment (or ROI) can be expressed as a percentage by dividing the money you gained by the initial amount you invested. For example, a return of $100 on an investment of $1000 would give you an ROI of 10%.

Tool of the Trade

Dean teaching

There are many opportunities for investment, so how do you decide where to put your money? Specifically, how can you anticipate a strong ROI?

Your most important tool is price, which reflects supply and demand. People will pay more for a good or service that is scarce and/or popular. The reverse is also true: people will pay less for a good or service that is abundant and/or unpopular.

Investors use price as a guide. They will invest in a particular opportunity that is commanding an ascending price in the market, because that opportunity is likely to yield greater profit than its alternatives. Likewise, they will decline investing in an opportunity with a tumbling price, because that opportunity is less likely to yield greater profit than its alternatives.

Savvy investors try to anticipate market trends. They might invest in an opportunity whose price has fallen below the norm, because they expect that price to rise again. (A security that investors perceive as undervalued is known as a bargain.) They may also ride out temporary downturns, because they expect long-term gains.

Investment opportunities are numerous, but a few examples are stocks and bondsprecious metals, and business ventures.

How Do You Take Your Risk?

Dean at Belmont HarborInvestors vary in their tolerance to risk. Conservative investors will flock only to those investments that are stable, with prices that don’t fluctuate much in the market. For these investors, capital growth will be slow but steady.

Some investors are more aggressive and will seek out opportunities that are riskier but leave more room for capital growth. High risk opportunities bring both the possibility of a higher reward and the possibility of great loss.

You Are An Investor

The kind of investment opportunity that is most relevant to you as an artist is a business venture. You are investing your resources — time, labor, and capital — in the production of goods, which you then sell for a profit.

As an investor, you will need to honestly assess your own risk tolerance. If the idea of risk scares you, then you should put your time, money, and skills into producing a kind of art that a lot of people like and are buying. Work in a style and medium that are popular. Hire a professional print service to turn your images into low-cost, usable items like t-shirts, messenger bags, and calendars. Order prints in bulk to cut down on costs, or, to further mitigate risk, have an item printed on demand only after a customer has placed an order.Sketching webcomic

Keep in mind that you will have to be competitive in order to be successful in a market that is already saturated with product. You will attract consumers by being more innovative than your competitors, or by undercutting their prices.

 Risky Business

My set-up at Art of SolsticeIf you are more comfortable with taking on risk, you might try to produce something totally unprecedented, or to succeed with a kind of product that has not historically sold well. There is nothing wrong with this approach, but it is not for the faint of heart.

Consider a balanced investment strategy, which combines the safety of low-risk investments with the growth potential of high-risk investments. This strategy can be a good business model for an artist, as she divides her resources between popular, salable items and more personal experiments.