Rational economic decision making and economic incentives
Economists assume consumers weigh up costs and benefits before every decision. They respond to incentives — rewards or penalties that make a choice more or less attractive.
Formula
Net Benefit = Total Benefit − Total Cost
Real World
When Uber introduced surge pricing during the 2017 London tube strikes, commuters rationally weighed the higher fare against the cost of waiting — many paid, demonstrating direct responses to price incentives.
Exam Focus
Always link incentives to a behavioural response — state what changes and in which direction, not just that 'incentives exist'.
Price Elasticity of Demand
PED = % change in quantity demanded ÷ % change in price
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