People respond to Incentives:
It is a Kind of motivation, which drives us to behave in a
certain way, while preferences are your needs, wants and desires.
Example:
When we go to a supermarket there we see a offer on a
product like buy 1 and get 1 free, so we go for that product other than the
other ones.
Cost Benefit Analysis:
Rational people always look for the benefits i.e., more than
its cost then the people will go for that product. Taste and preferences plays
a main role in decision making.
Example:
Investing in property i.e., buying a plot or a flat. Here,
we see the future benefits as a rational person. A rational person will not
invest if he/she won’t see the future benefits.
Law of Diminishing Marginal Returns:
It states that when you apply more and more capital and
labour to a production process, your production capacity increases reaches to a
maximum level it becomes constant for a while after that you increase your
inputs, your production will start declining.
Example:
When you add fertilizers and labour to an agricultural land
at first, the production of the crop increases. As you increase more inputs
production will increase to a certain level but after a point of time, the land
will start becoming unfertile, so even you increase your input production will
decline.
Price Mechanism:
Whenever there is a shortage of supply in the market, the
demand of the product increases and the price also increases because at this
point the seller would take the advantage and will earn more profits.
Example:
If there is limited edition bike of Yamaha FZ the demand of
this bike is high so the dealer of Yamaha will definitely try to take advantage
of the situation.
Income Effect:
The person having a high income will spend more money than
the person who is having low income.
Example:
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