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Economics is all about theory. And in theory, money flows about the world in predictable, fair and efficient ways.

In theory.

In a perfect economic world, companies would compete with each other, eternally striving towards monopoly–one company completely controlling the market for a product–but instead locked in perfect competition, driving prices towards a minimum. This minimum would be high enough to cover the cost of the materials and production, but low enough that people would not be willing to pay a cent more.

This is the point of zero economic profits. It’s different from what we think of as business profits. An economic profit means that you managed to take some money off the table that you shouldn’t have been able to take…that you should be able to sell it for a buck based on what it costs to produce and a reasonable markup that mirrors what the industry expects the markup to be, but you sold it for a buck and a quarter. That’s a quarter you shouldn’t have been able to make. But you did. Somehow.

For some products, a very small price increase means that the demand drops to nothing; nobody is willing to pay a penny more. That’s called a high price elasticity of demand–you have that a lot in commodity items, or items where there’s no real quality difference between one producer’s brand and another, like grain or road tar or other raw materials. You’re not going to pay an extra nickel per ton of somebody else’s gravel. But for a nickel less, you’ll buy a lot more. And then there’s a low price elasticity of demand, where you can move the price up or down quite a bit before it impacts how many people want to buy it. Gasoline is a great example of that.

In theory, markets are efficient. That means that the price of a stock should include everybody’s assumptions about its future performance, and shares of AAPL shouldn’t jump when Steve Jobs takes the stage and announces the latest iSomething. When you pay $250 a share, that includes the belief that Apple is going to come out with all kinds of innovative products at various points in time, which is what makes it worth that share price.

Opinion time: reality–Enron, the real estate bubble, the tech bubble, and countless other stories of free market systems gone wrong–has convinced me that markets are anything but efficient.

Apple’s stock price does change, because people aren’t rational, and efficient markets count on people acting like little economic machines–or that everything will even out in the end, because irrationality in different directions will average out to sensible behavior. If that’s true, I haven’t seen it.

You’ve read it before, and you’ll read it again before MBA-A-Day is done: people are messy.

Leadership is credibility. Credibility means people believe you’ll do what you say you’ll do. Doing what you’ll say you’ll do means people will trust you.

You can’t lead people without trust. You can’t lead people without having a place to lead them. You can’t lead people without telling them where you’re going.

That’s leadership.

Of course, if you have consistently bad ideas, nobody will follow you either. It helps if you have the sort of charisma necessary to excite people, to get them to buy into causes or concepts in a way that makes them feel as if it was their idea all along.

Leadership can be a bad thing, if you use it to take advantage of people or lead them to do bad things. But by itself, leadership isn’t good or bad: it’s a tool to move people and events in a given direction, for good or ill.

To become a strong leader, begin by telling people that you’re going to do a particular thing. Do it. Repeat.

Build credibility over time. Get a reputation for being the sort of person who can be trusted, and who has a history of getting a particular kind of result. You don’t always have to succeed, but when you fail, own up to it and be open to why it happened. Improve.

Relatively simple, but the kind of thing that takes a long, long time to master. No shortcuts.

Most people think of “marketing” as “sending fancy fliers in the mail or making banners for trade shows.” But that’s “Marcom,” or “marketing communications.” Real marketing is the art of building the right product for the right audience and getting them to buy it.

First, you need to think about who might want to buy a particular product; this means you need to think like your customer, and it also means that you need to either a) make changes to your product until it matches their needs, or b) find a different set of customers who do need your product in its current form, or c) do a little of both.

Then it gets harder. This set of customers can be thought of as the wide end of a funnel, your “sales funnel”. Of your entire target audience, who is going to agree with your assessment that they need it? The funnel gets narrower. Of those, how many of them are going to be aware that your product exists? Narrower still. Of those, who are going to be in the right place, at the right time, credit card in hand, with the ability to make a purchase? Getting really narrow now. Finally, who is going to look at how much it costs, decide that it’s a good idea, and fork over the cash?

That’s where you need to get to.

Funnels can be all different shapes and sizes. If you advertise during the Super Bowl, your funnel is going to start by being really, really wide. And if your product happens to be sold at grocery stores around the country for about a buck, your funnel may just look more like a tunnel.

Now suppose your product is a bed and breakfast you run in a small town in Massachusetts. Not much point in that Super Bowl ad; most people who see it aren’t going to need or want your product. Maybe your funnel is a lot narrower. Now your problem is different: how do you get people who vacation in Massachusetts to know about your B&B, how do you figure out the sorts of things they want to see in their vacation property, and how do you set a price for a weekend stay that matches their expectations? That’s a thin funnel indeed.

This is where the concept of “levers” comes in. If literally everybody in the world can use your product, you need to figure out a way to let them know it exists. If only a few can use it, you need to figure out how to get the message to those specific people. Maybe they know about it, but can’t buy it–like running an ad for a New Jersey restaurant in Maine. Maybe they can buy it, but it’s too expensive. All these levers can be adjusted.

Levers have costs. Getting a really wide funnel (broad advertising) or a really narrow funnel (targeted advertising) are both expensive. Figuring out what price people are willing to pay means doing market research, or setting multiple prices at different places, or both. You might discover that your amazing product isn’t amazing to anybody but you and have to radically change it, or dump it altogether.

Those are the 4 Ps of Marketing: Product, Promotion, Place, and Price.

A dollar today is not worth the same thing as a dollar a year from now.

If you promise to give me a dollar in a year, I can’t do anything for a year. But if you give me a dollar today, my options are open: I can put that dollar in the bank and collect interest, I can use it to buy raw materials so I can make something and sell it at a profit, I can invest it in the stock market…or I can just spend it. The point is, I have the option to make that dollar increase in value over the course of the next year.

If I invest that dollar at 5% annual interest, it’ll be worth $1.05 in a year. What that means is that, if you gave me the option of a dollar today or a dollar in a year, I would say that you’d have to give me at least $1.05 in a year for it to be worth my while to wait, because I believe that I can get 5% if I have that dollar today. This is called the “internal rate of return,” or IRR, and the value of my dollar today is called the “net present value,” or NPV.

Thought about it another way, I’d gladly take 96 cents today instead of a dollar year from now, because I ought to be able to earn that extra 4 cents over the course of a year…and maybe more. That’s one reason people who win the lottery aren’t crazy for taking the lump sum: with proper investing, they may be able to earn more money than if they just divided the payments up over time (the amount of that lump sum is actually based on the lottery’s calculation of NPV).

In business terms, you would use this to decide whether or not to make a particular investment, or go forward with a particular project. If you plan to spend $1000 launching a new business, and you determine that you can probably just turn that $1000 into $1050 in a year if you put it in the bank, then your new business would need to be worth at least $1050 in a year for it to be worthwhile. If it wasn’t, you’d just skip all the risk and settle for earning interest.

That’s simplifying it a bit. Figuring out what is a realistic IRR is a big part of the process. But it does illustrate a really important point: the power of compound interest over time. Earning a nickel on a dollar over the course of a year isn’t much of a thing, but imagine earning $50,000 a year on a million-dollar investment.

It takes money to make money.

Big businesses are not all that different from high school.

There’s the way that things are supposed to work–you’re not supposed to have to worry about your teacher/boss bullying you or your classmate/coworker taking credit for your work, and the teachers/management are supposed to always know the right thing to do, and do it.

But your job, just like your high school, is filled with–and run by–people. And people are complicated, vindictive, confusing, sympathetic, pathological, and messy. They make mistakes. They make bad decisions. Behind a thin facade of competence, they’re frequently so disorganized that it’s amazing that they function at all.

Sometimes the good guys lose (their jobs) and the bad guys win (a promotion). Sometimes good guys lose because they are good and doing the right thing, and sometimes bad guys win because they are being unethical, territorial, or just mean.

You might easily find yourself in a no-win situation. Try to follow Sun Tzu and The Art of War and don’t start a battle (job) you can’t win (be successful, happy and well-compensated at). But remember that “no-win” means “you can’t win” and don’t be too surprised when it happens. Just pick up the pieces and try to put yourself in a better situation next time.

And, if you can help it, try not to be the bad guy. Every once in a while, the bad guy gets his, and jail isn’t fun.

Assets = Liabilities + Equity.

That’s all there is to accounting.

Your assets represent the things you have that have value…your house, your possessions, your education. Your liabilities represent the money you owe for those assets. Your equity represents the difference.

If you pay for a new car, that’s an asset. But you still owe the bank money for the car. That’s the liability. As the value of your car decreases, it may go down faster than the amount you still owe. If you have assets that are worth more than your total liabilities, you have positive equity, which is good. If you owe more than the value of your assets, you have negative equity, which is bad.

“Bad” assets are things that don’t make you money and lose their value, like expensive cars, clothes, vacations, entertainment, and dinners. “Good” assets are things that do make you money and increase in value, like a higher education, investments, and (sometimes) real estate.

That doesn’t mean that you should never go to the movies or that you shouldn’t buy a car. It does mean that you should be careful to spend your money–to increase your liabilities–on things that can make you more money than what it cost you to buy them.

If your equity is high, that means you’ve got a lot of value and you don’t owe much money on it. And that’s how you get rich.

Easy, huh?

My MBA is almost complete! In celebration of my impending graduation, I thought it would be fun to go through every class I’ve taken and, once a day, briefly summarize what it taught me. I’m not planning to just comb through my notes in search of nuggets of wisdom, but to tell you what I learned…the stuff that’s stuck with me through the last four years.

Here’s a bonus observation about the program as a whole: you get out of your education what you put into it. My goal, all along, was simply to leave a class with at least one more piece of knowledge than I had when I began. It’s ok not to know your endpoint at the start of a journey…as long as you keep moving forward.

Check back as I count down to May 14th!