Explain the impact of incentives on the behaviour of economic agents and resource allocation.

Each economic agent has certain objectives, and they respond to incentives in order to maximise these goals. Incentives refer to potential monetary gains (e.g. profit incentives), or utility gains (e.g. from consumption of a good for a household), and when incentives are given properly, resources are allocated correctly and a market equilibrium is achieved.If the marginal benefit of performing an action is greater than the marginal cost of performing an action, the economic agent will do it. For example, due to the law of diminishing marginal returns, the marginal benefit of consuming a good will reduce, thus the incentive for increasing consumption reduces. An increase in the cost of a good will also reduce the incentive to consume it, as the difference between marginal benefit and marginal cost reduces.

Answered by Catriona H. Economics tutor

9463 Views

See similar Economics A Level tutors

Related Economics A Level answers

All answers ▸

What are the causes and effects of globalisation?


What conflicts between macroeconomics objectives may occur in an economy?


What would be the impact of an outbreak of bird flu on the price of eggs in the UK?


Why are no supernormal profits made in perfect competition in the long run?


We're here to help

contact us iconContact usWhatsapp logoMessage us on Whatsapptelephone icon+44 (0) 203 773 6020
Facebook logoInstagram logoLinkedIn logo

© MyTutorWeb Ltd 2013–2025

Terms & Conditions|Privacy Policy
Cookie Preferences