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Incentives in Modern Day Economics

This post looks into the concept of economic incentives in modern-day markets and analyzes the Law of Demand, which states that people in an economy respond to incentives

In economics, the law of demand states that price and quantity demanded of any good and service are inversely related to each other. Think of it like this: if the price of apples is lower than usual, consumers are incentivized to buy or demand more, and vice-versa; if price is higher then they are less likely to demand.


Why do Incentives Matter?

  • Economic incentives are what motivate you to behave in a certain way, while preferences are your needs, wants and desires. Economic incentives provide you the motivation to pursue your preferences

  • The most famous example in economics is the idea of the demand curve—when something gets more expensive, people buy less of it. When it gets less expensive, people buy more of it….

The key reason economists believe in the law of demand so strongly is that it is so plausible, even to non-economists. In reality, the law of demand is ingrained in the way we think about everyday things. Shoppers are buying more strawberries in season, and when the price is small. This is evidence of the law of demand: consumers are only willing to buy the higher amounts at the lower, in-season price.


Modern-day economies:


We see the same point every day in countless ways. No one thinks, for example, that the way to sell a house that has been languishing on the market is to raise the asking price. Again, this shows an implicit awareness of the law of demand: the number of potential buyers for any given house varies inversely with the asking price….


Incentives make up a large part of our economy and even our everyday lives. We encounter incentives all the time, rather it be as a consumer or as an economists.


Economic incentives can be seen in many modern-day markets. The stock market, for example, employs incentives in many manners. Corporations lower the prices of their shares every day to incentivize and motivate investors. All in all, Incentives are a great way to ensure that your audience stays motivated to the best of their ability. By offering something they can achieve if they hit a certain target or achieve something, they have something to work towards.

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