econ 101 – people respond to incentives

Economics is all about the allocation of scarce resources, whether those resources be money, time, space, mental effort or any other reason. Human beings have unlimited wants, but limited resources to attain their wants. This means they must prioritize their wants in order to determine where to put their resources. This is not necessarily a conscious determination. A pedestrian might subconsciously determine to spend a little bit of time to wait for a walk signal, because walking across a busy street might end up being too costly. The pedestrian makes these calculations instantaneously as conditions change. Each individual decides second by second and day by day their best use of scare resources.

My children love playing Nintendo. They wish to dedicate 100% of their time to playing video games, but the needs of reality sometimes trump their video game wishes. They might take a break to go to the bathroom, to eat, to sleep, or even to figure out what candy their sister received and ask for some themselves. Although my children wish to play Nintendo 100% of available time, they prioritize more pressing concerns. Time they spend sleeping (judging from their behavior one assumes they do not value sleep at all) is time not spent playing Nintendo. Time they spend asking for candy is time they do not spend playing Nintendo. Time spent at the store is time spent not playing Nintendo.

People respond to incentives. An incentive merely is the change of a cost relative to other costs. Because changing the cost of an item necessarily changes the ranking of preferences, the rule is that human beings respond to incentives. If my wife places time limitations on the amount of time my children can play video games, suddenly they become much more willing to take a trip to the store, play with toys in the basement, or even run around outside. In essence, a time limit on video games is an increase in the cost of video games. My boys might try to play longer than their time limit, but there may be parental repercussions. The boys naturally understand the cost is too high after their time limit is reached. Not using this time on Nintendo then frees up resources which the boys can then devote to their lesser prioritized tasks.

The fact that people respond to incentives leads observers to a general second rule: people consume more or something when the costs are low and people consume less of something when the price is high. Conversely, people want to provide more of something when the profits are high and want to provide less of something when the profits are low. The law of supply and demand.

About christopher fisher

The blog is meant for educational/entertainment purposes. All material can be used and reproduced in any length for any purpose as long as I am cited as the source.
This entry was posted in Econ 101, Economics, Human Nature. Bookmark the permalink.

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