Question

• Define the term Incentive
• Provide an original, economics-based explanation of the term
• Provide a real/hypothetical contextual example (different from that provided in the text) of the term as it is applied to economics.

Answer 1

Firstly I would like to explain the meaning of Incentive

Meaning- Incentive is something that makes someone want to do something or work harder. An example of incentive is extra money offered to those employees who work extra hours on a project.

Economics based definition and explanation of the term Incentive.

Definition- According to the The National Commission of Labour defines incentive as follows: ‘wage incentives are extra financial motivation. They are designed to stimulate human effort by rewarding the person, over and above the time rated remuneration, for improvements in the present and targeted results’.

There are two types of incentives that affect human decision making: intrinsic and extrinsic.

• Intrinsic incentives. Intrinsic incentives come from within. That is, a person with an intrinsic motivation wants to do something for its own sake, without an outside pressure or reward. Intrinsic incentive is that feeling of personal fulfillment and satisfaction that people get from doing certain things, like learning a new skill just for the fun of it.
• Extrinsic incentives. Extrinsic incentives involve providing a material reward (like money) for accomplishing a task, or threatening some punishment for failure to do so. By definition, all economic incentives are extrinsic motivations. Real example I explained as per this context
• The market economy is the ultimate and real example of how a set of rules can create a setting in which private incentives motivate social cooperation. Market economies don’t create incentives directly. Indeed, in a literal sense, markets don’t create incentives at all. The most important incentives come from the subjective desires of individuals: the incentive to find love, to earn respect, to make the world a better place, to provide for their families. Markets are the rules of conduct that harmonize these various incentives by making it possible for people to communicate their desires to others. The prices, profits, and losses commonly referred to as market incentives, are created by people’s interacting with one another. These incentives, which can be communicated only through markets, contain information that promotes social cooperation. Hope this will help you ?