Economic Incentives

A fundamental tenet of economics is that human behavior is explained by the combination of preferences and incentives. Preferences reflect the wants, needs, and desires of humans, while incentives are what actually motivates behavior. If people prefer to maximize their utility (or satisfaction) and if businesses seek to maximize profits, then those things that will result in increased utility or profits are by definition economic incentives. Economic incentives cannot be understood without taking account of preferences. For instance, people who prefer only wealth will likely respond differently to monetary rewards than people who prefer power or social status rather than wealth. When explaining and predicting human behavior, economists assume that preferences do not change. Therefore, changes in behavior are explained by changes in economic incentives. ...