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    People Respond To Incentives

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    Prerna Portel Silwal
    1) Gregory Mankiw's fourth principle of economics states that people respond to incentives. This document explores how incentives influence the behaviors and decisions of individuals, firms, and policymakers. 2) For individuals and firms, incentives like lower prices motivate changes in behavior - consumers buy more of a product while producers make and sell more. 3) Policymakers must also consider how incentives shape reactions to policies. Higher taxes on cigarettes, for example, encourage reduced smoking in some places but not others depending on how accessible cigarettes remain.

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    People Respond To Incentives

    Uploaded by

    Prerna Portel Silwal
    160 views2 pages
    1) Gregory Mankiw's fourth principle of economics states that people respond to incentives. This document explores how incentives influence the behaviors and decisions of individuals, firms, and policymakers. 2) For individuals and firms, incentives like lower prices motivate changes in behavior - consumers buy more of a product while producers make and sell more. 3) Policymakers must also consider how incentives shape reactions to policies. Higher taxes on cigarettes, for example, encourage reduced smoking in some places but not others depending on how accessible cigarettes remain.

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    People respond to Incentives

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    1) Gregory Mankiw's fourth principle of economics states that people respond to incentives. This document explores how incentives influence the behaviors and decisions of individuals, firms, and policymakers. 2) For individuals and firms, incentives like lower prices motivate changes in behavior - consumers buy more of a product while producers make and sell more. 3) Policymakers must also consider how incentives shape reactions to policies. Higher taxes on cigarettes, for example, encourage reduced smoking in some places but not others depending on how accessible cigarettes remain.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    160 views2 pages

    People Respond To Incentives

    Uploaded by

    Prerna Portel Silwal
    1) Gregory Mankiw's fourth principle of economics states that people respond to incentives. This document explores how incentives influence the behaviors and decisions of individuals, firms, and policymakers. 2) For individuals and firms, incentives like lower prices motivate changes in behavior - consumers buy more of a product while producers make and sell more. 3) Policymakers must also consider how incentives shape reactions to policies. Higher taxes on cigarettes, for example, encourage reduced smoking in some places but not others depending on how accessible cigarettes remain.

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    © All Rights Reserved
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    In an economy, it is certain that the behavior of an individuals is the result of an economy

    behavior. Based on this idea, people respond to many things which enhances their decision
    making. The 4th principle of Gregory Mankiw is “peoples respond to incentive” explains that
    economic behavior such as incentives causes people to react to it.
    The idea of this principle makes sense the reason for any rational consumer willing to pay more
    for diamond than water. This is because incentives can take several forms in economic which
    includes taxes, price and fees. For instance, taking the example of highly known cell phone
    company i.e. iPhone from Apple Inc., the older version of their phones is sold at lower rate than
    it was at first. When the prices of these specific models decrease, the consumer who was
    previously using another brand now wants to buy iPhone. For the seller, the firm may now want
    to decrease the sale of those earlier version iPhone and divert its resources to produce the
    latest iPhone. The behavior of the individual in this example changed because of the
    environmental variable of benefits and changes in costs as per economics. The buyer now can
    purchase iPhone at lower cost and the seller can earn higher profit by selling latest model
    iPhone with optimum resources available. It is rational that both the buyer and seller is
    responding to this incentive, it is there to influence behavior of individuals for a particular good
    and services.
    Any individual responding to such incentive derives them a reward, with the fact that the
    responses are made by comparing cost and benefits that can be derived through the decision. It
    also indicates how incentive plays a vital role in supply and demand market of the product. This
    demonstrate the economic concept of how the amount purchased and consumed rises while
    the prices fall. A higher price in a market results as an incentive for the sellers to produce more
    and the buyer to consume less. In other words, we can say that incentives help us to analyze
    the way a market function. The decision of a firm on how much to produce and how many
    people to hire to produce that product is influenced by the market economy on allocating
    resources that are scared.
    Coming to public policy maker, it is essential for them to consider incentives because the nature
    of policies may change the benefits that individual get which alters a reaction. For instance, the
    tax imposed on cigarettes will encourage people to decline the use of cigarettes in the country.
    Looking in the case of Bhutan, only handful of shop sell cigarette because of high taxes imposed
    on tobacco. Whereas, in India since the tax on tobaccos are very significant, most shops sell
    cigarettes and has companies producing tobaccos. If the policy maker does not give attention
    on how policies affect the incentives, then it sometimes led to big consequences. Even when
    the taxes are heavily imposed some individual would still want to consume the good. So, for the
    further supplement RGoB has put forward the limitation one can import in the country. This
    ensure the bar is to set to prevent health issue resulting from cigarette. On the other hand,
    India is exposed to high risk of getting health issues due to highly available product.

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