Marginal changes are small incremental adjustments to an existing plan of

Marginal changes are small incremental adjustments to

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Marginal changes are small incremental adjustments to an existing plan of action. - Therefore, people make decisions by comparing costs and benefits at the margin. 4. People Respond to Incentives: Rational people respond to incentives because they make decisions comparing costs and benefits. - The study of people’s incentives are crucial, as it plays an important role in analysing how markets work and why some public policies are working or failing. Note**: An incentive is something that induces a person to act, for instance, the prospect of reward or punishment. 5. Trade Can Make Everyone Better Off: People gain from their ability to trade (a voluntary exchange) with one another. - Competition results in gains from trading. 6. Markets are Good for Organizing Activity: When resources are allocated in freely operating markets, price acts as a-n allocative mechanism. When we don’t use markets, and price is not used as an allocative mechanism, something or someone else has to do this job. - Market economy = an economy that allocates resources through the decentralized decisions of many firms and households as they interact in markets. Buyers and sellers act in their own interest but end up unknowingly taking into account the social costs of their actions. Prices thus guide decision makers to outcomes that tend to maximise the welfare of society as a whole. 7. Governments Can Sometimes Improve Market Outcomes: Although markets are generally the best mechanism through which to allocate resources, sometimes markets fail. - Externality = the impact of one person or firm’s actions on the wellbeing of a bystander In these situations, we often require the government to intervene in the market to produce the socially efficient outcome. Key Concepts
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