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.

CH
Answered by Catriona H. Economics tutor

10049 Views

See similar Economics A Level tutors

Related Economics A Level answers

All answers ▸

What is a budget deficit?


How have the Big Six energy companies benefited from vertical and horizontal integration?


To what extent do consumers benefit from price discrimination by a firm with monopoly power? (8 Marks)


Amazon currently sells 100 000 copies per year of an e-book at $14.99. The company estimates that customers would buy 174 000 copies of the same e-book at a price of $9.99. What is the effect on Price elasticity of Demand and Total


We're here to help

contact us iconContact ustelephone icon+44 (0) 203 773 6020
Facebook logoInstagram logoLinkedIn logo

MyTutor is part of the IXL family of brands:

© 2025 by IXL Learning