That word is marginal which means additional why is

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Unformatted text preview: onal. incentive Something that encourages or motivates a person to take action. 14 An important economic term will come up throughout this text when discussing costs and benefits. That word is marginal, which means “additional.” Why is the term marginal so important? It is because economists believe that when Chapter 1 What Is Economics? You have just eaten two chicken tacos for lunch and are trying to decide whether or not to go back for a third. You are still hungry, but if you get another taco now, you will have no money left for a soda after school. Are you really that hungry? EXAMPLE: In making the decision described above, you are comparing the marginal benefits of one more (an additional) taco against the marginal costs of one more taco. If you decide that the marginal benefits are greater than the marginal costs, you will buy the additional taco. If, on the other hand, you decide that the marginal costs are greater than the marginal benefits, you will keep your money and go without the additional taco. An economist would say that you were “making decisions at the margin,” a process that you will encounter in several of the following chapters. Thinking in Terms of Incentives Economists often speak of incentives in reference to actions. An incentive is something that encourages or motivates a person to take an action. For example, suppose that Amy lives in a country where every dollar she earns is taxed (by government) at 100 percent. With a tax rate of 100 percent, an economist might argue that Amy does not have an incentive to produce anything for sale. Why work all day to produce a good that is sold for, say $100, when you will have to turn over the full $100 to the government in taxes? Now let’s lower the tax rate in Amy’s country from 100 percent to 20 percent. In your mind, has the lower tax rate provided Amy with an incentive to work and produce? An economist would say it has. The lower tax rate encourages or motivates Amy toward a particular action—working and producing—because now Amy can keep 80 cents out of every dollar she earns. 01 (002-029) EMC Chap 01 11/17/05 4:03 PM Page 15 E X A M P L E : Kenneth, who is 15 years old, and lives with his parents, does not have an incentive to mow the lawn. There is absolutely nothing that encourages or motivates him toward mowing the lawn. Then one day Kenneth’s father offers him $10 to mow the lawn. The $10—the money—is an incentive for Kenneth to mow the lawn. It encourages or motivates him toward mowing the lawn. E X A M P L E : Jimmy lives in country A, where people are not permitted to own property, so Jimmy rents a house from the government. Adam lives in country B, where people are permitted to own property, so Adam owns his house. Who is more likely to take care of the house he lives in? The answer is Adam. The reasoning is simple: Adam can sell the house he lives in (because he owns it); Jimmy cannot sell the house he lives in. Any damage Adam does to his house lowers the selling price of the house. The moral of the story? Private property ownership acts as an incentive to taking care of things. Thinking in Terms of Trade-Offs As you learned in Section 1, trade-offs involve opportunity costs. When more of one thing necessarily means less of something else, we have a trade-off. For example, when we drive our cars, we pollute the air. One way to cut down on the amount of pollution is “Most of economics can be to drive less. In other summarized in four words: words, more driving means People respond to incentives.” less clean air, and less driv—Steven Landsburg, economist ing means more clean air. More of one thing (driving) necessarily means less of something else (clean air). We have a trade-off between driving and clean air. Individuals Face Trade-Offs You might notice that when trade-offs arise in life, you sometimes have to stop and think what course of action you want to take. Like individuals, societies face trade-offs. What trade-off is represented by these two photographs? Section 2 The Economic Way of Thinking 15 01 (002-029) EMC Chap 01 11/17/05 4:03 PM Page 16 E X A M P L E : Suppose Mary Ann loves to eat, but she has recently put on (what she considers to be) a few too many pounds. She wants to lose some weight for two reasons: (1) to feel more comfortable in her clothes and (2) to reduce the risk of heart disease, which is linked to being overweight. So Mary Ann goes on a diet and cuts her calorie intake from 2,500 to 1,800 calories a day. Does Mary Ann face a trade-off? Sure she does. On the one hand, if she doesn’t go on a diet, she gets to continue eating what she wants to eat (that’s good), but she won’t feel as comfortable in her clothes and she increases her risk of heart disease (that’s bad). Of course, on the other hand, if she does go on the diet, she will likely feel more comfortable in her clothes and be healthier (that’s good), but she will have to avoid some of her favorite foods and feel hungry much of the day (that’s bad). No matter what...
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