Economics

“People Respond To Incentives” & its relationship with “People Face Tradeoffs”

“People Respond To Incentives” & its relationship with “People Face Tradeoffs”

Key Concept & Arguments

People make tradeoffs because there are not enough resources and services to go around for everyone. An individual usually gives up one thing to acquire another. This leads us into when people choose one thing they give up something else. This principle means that each person has a limited amount of money and time to give. They are forced into deciding what is more important to their needs or wants at that time. Then the principle of rational people think at the margin comes into play. When a person has to make a decision there usually is a plan or existing action that the person wants to make an adjustment to. These margins are important. If the benefit exceeds the cost then the person will proceed. The last principle is people respond to incentives. When a person makes a change to their cost is could be beneficial. This will lead to an incentive. The better the benefit is the better the incentive for that person.

There are incentives in all aspects of our lives, such as, home where you do your chores and get rewarded, or at work when you do extra jobs to get a promotion or raise, or at school where you do some extra credit for a better grade. As economist Steven Landsburg writes in The Armchair Economist (1991, p 3), “Most of economics can be summarized in four words: 'People respond to incentives.' The rest is commentary.”

People care about their employers, but they also care about their families, hobbies, gardens, and churches, which for the most part is why the incentives work so well.

Individuals make decisions based on four main principles ...