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INCENTIVE: A cost or benefit that motivates a decision or action by consumers, businesses, or other participants in the economy. Some incentives are explicitly created by government policies to achieve a desired end or they can just be part of the wacky world we call economics. The most noted incentive in the study of economics is that provided by prices. When prices are higher buyers have the "incentive" to buy less and sellers have the "incentive" to sell more. Price incentives play a fundamental role in the . When prices are higher buyers have the "incentive" to buy less and sellers have the "incentive" to sell more. Price incentives play a fundamental role in the allocation. When prices are higher buyers have the "incentive" to buy less and sellers have the "incentive" to sell more. Price incentives play a fundamental role in the allocation system that society uses to answer the three questions of allocation.

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Lesson 1: Economic Basics | Unit 3: The Economy Page: 7 of 18

Topic: An Economy <=PAGE BACK | PAGE NEXT=>

Because of the scarcity problem, we need a way to divide up what we have. This is accomplished by an economy.

An economy is a system of production, distribution, and consumption of resources, goods, and services that addresses the basic economic problem of scarcity and answers the three questions of allocation: What? How? For Whom?

Economies rely on markets and government to perform the allocation task.

The allocation processes involves the institutions of:

  • Markets allocate resources through voluntary choices made by people--buyers and sellers.
  • Government allocates resources through involuntary taxes, laws, restrictions, and regulations imposed on these people.
Both are important methods of allocation.

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ABSOLUTE ADVANTAGE

The general ability to produce more goods or services using fewer resources. A person or country has an absolute advantage in production largely due to superior technology or greater technical efficiency. A related, but contrasting concept is comparative advantage. Both terms are perhaps most important to the study of international trade, but also provide insight into other exchanges.

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Today, you are likely to spend a great deal of time touring the new suburban shopping complex wanting to buy either decorative picture frames or storage boxes for your income tax returns. Be on the lookout for broken fingernail clippers.
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There were no banks in colonial America before the U.S. Revolutionary War. Anyone seeking a loan did so from another individual.
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