Economics ways in which economic agents — people, firms or the government — take economic decisions. It also tries to understand the implications of this decision-making process for the allocation of resources within society.
Putting it all together is like a jigsaw puzzle where you start with lots of pieces that all look different, but then assemble them to end up with a coherent picture, in which every piece is significant. One of the most important pieces of the economics jigsaw puzzle concerns incentives. It is impossible to analyse how decisions are taken without knowing something about the objectives of the decision makers. For example, if we are trying to analyse a firm’s decision about how much output to produce in the coming period, we cannot make any headway unless we know what the firm’s objectives are. And if we know about objectives, we also know something about the incentives to which the firm will respond. Knowing about incentives may allow the government to influence firms’ behaviour.
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