economic choices. incentive economics focuses on the choices people make economic reasoning is used...
Post on 16-Dec-2015
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Incentive
• Economics focuses on the choices people make
• Economic reasoning is used everywhere
• People make choices based on their perceptions of what is best for them
• People’s choices reflect their perceptions of the expected costs, benefits, & the alternatives they face
• The key to understanding human behavior lies in identifying incentives
• Incentives are rewards or punishments that influence people’s actions
• When incentives change, people’s behavior changes
• The 1st thing we must recognize is that people face trade-offs (alternative choices) w/ every economic decision
Opportunity Cost
• We live in a world of relative scarcity
• Scarcity forces people to choose between alternatives
• Individuals’ evaluation of alternatives is subjective
• The distinction between needs and wants is individual
• Societies have adopted different ways to deal with scarcity
• In economics, cost is related to opportunity cost- cost of the next best alternative use of money, time, or resources when one choice is made over another
• The opportunity cost of choosing one alternative is the value given up by not taking advantage of the next best alternative
• To choose is to refuse!• The decision to take the benefits
of one alternative means refusing the benefits of the next best opportunity
• You spend $5,000 on a used car• The OC = the value of the stereo, apt, vacation
you could have purchased• Even time has OC, the time you spend on one
thing could be spent on another
• We seldom make all or nothing decisions
• Life is an exercise in marginal decision making
• Decisions to continue or discontinue an activity are made by weighing the expected benefits against the expected costs
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