MGT Notes

Reference, ‘Principles of Economics,’ by N. Gregory Mankiw, 3e, Pg 7

An individual’s decision-making behavior is related to the costs and benefits one faces. As a general rule, people respond to initiatives. For example, the effect of price on the behavior of buyers and sellers is important to understand how the economy works. If the price of a commodity goes up, buyers would be incentivized to switch to a lower cost but equally useful commodity if its available. The seller however would invest more in making that commodity if its demand is similar to what it was before the price change, since profit would be higher.

Policies are designed to modify the costs and benefits that people face, thus altering their behavior in a well-intentioned direction. Policy designs ought to consider not only direct but also indirect effects of their implementation. As an example, higher taxes on one mode of transportation would incentivize people to switch to another, more economical path. An unintended consequence could be an unforeseen change in the transportation business landscape.