Prices of commodity consumers want determine the demand of given commodity. Because, more the prices, lesser the demand due to no willingness or ability to pay the rising price to commodity. This is the reason why people responds to incentives in terms of discounts, cash back, extra quantity, voucher, tax reliefs, etc.
List of 10 basic principles of economics
1.People face trade offs.
2.The cost of something is what you give up to get it.
3.Rational people think at the margin.
4.People responds to incentives.
5.Trade can make everyone better off.
6.Markets are usually a good way to organize economic activity.
7.Governments can sometimes improve economic outcomes.
8.The standards of living depends on country’s production.
9.Prices rise when the government prints too much money.
10.Society faces a short run trade offs between inflation and unemployment.
Understanding demand and consumer behaviour
Desire, willingness to pay, and ability to pay construct demand of consumers in market. Even though consumers have desires but not willing to pay heavy price, they don’t go for that commodity. In simple terms, apart from desire and willingness to pay, it is equally important to have an ability to pay as well to realize satisfaction of commodity they consume.
Why do producers offer incentives?
In day-to-day life, people hardly depend on the basic needs for survival but have different choices to enjoy quality of life. Obviously, they can be induced easily either to purchase commodity or service that may be out of affordability by giving some concessions.
That’s why various firms always offer attractive incentives to induce or attract consumers to boost consumption or generate demand. Fourth principle out of ten principles of economics deals with”people respond to incentives”.
What do incentives mean in economics?
Incentive is a powerful means to affect basic forces of economics –demand and supply. Hence, in the study of consumers behavioral patterns and economics at large, studying incentives seems inevitable.
Specifically, incentive is a means and ways that used by sellers to encourage, attract, and induce people interested to purchase given commodity or service but can’t owing to unaffordablility.
Types of incentives used in competitive markets (Difference between positive incentives and negative incentives)
At the macro level, there are two types of incentives widely used by policy makers either to boost or detter demands in market. In the layman’s language, one is negative and second is positive incentives.
For example, tax incentives or tax benefits, financial incentives like discounts, subsidies, tax rebates are the examples of positive incentives.
Fine fees, laws, rules and regulations and tickets are the examples of negative negative incentives used to detter people to consume less.
What role do incentives play in market?
Following are some authentic, rational reason behind incentives and probable impact on consumer, as well as producers behaviours.
Determines the production of commodity
Generally, whenever the prices of a particular product or service rises, the seller boosts production activities by hiring more human resource or factors of production to ensure more supply. At the same time, due to higher prices, consumers consume less to adjust monthly budget.
Incentives help to correct market failures when disequilibrium arises
In this situation, policy makers offers certain financial incentives to ensure sustainable demand in market. Otherwise, there may be wide fluctuation in production activities that may disrupt entire mechanism.
Either to boost productivity, economic growth, or improve quality of life of people in sustainable manner, incentives have greater role.
Therefore, Understanding incentives is necessary to know the consumer behaviour and so the functions of economic system. Undoubtedly, it is a powerful means to affect the economic growth and development of given system.
Final thought on fourth principle of economics — people responds to incentives.
In the world, most of the economists agree with the principle that people respond to incentives and Understanding the role and importance of incentives is essential to guide the economic system in question.
Positive and negative externalities