Economic Incentives and Activity

Economic actors make decisions based on their calculations of expected utility and expected cost.
They respond to changes in their environment or schemas that modify their estimations.
An incentive is a factor that encourages or motivates economic actors to engage in a particular action.
A disincentive is a factor that discourages a certain behavior from economic actors.

The UK government constructed the London Orbital Motorway in the 1980s to alleviate traffic congestion.
Despite the updated road infrastructure, the area soon experienced a return to high congestion levels.
City planners failed to foresee:
- The new highway incentivized nearby residents to commute by car rather than using public transportation (train), leading to an increase in the number of cars on the road.

Individuals can develop or change habits by adjusting the incentives and disincentives encountered in daily life.
To maximize the likelihood of performing a desired action:
- Modify immediate environments to create incentives for positive behaviors and disincentives against negative behaviors.

Incentive: Engage in alternative activities for relaxation and entertainment that don’t involve spending money, e.g., reading or exercising.
Disincentive:
- Delete apps (e.g., Instagram) that lead to unnecessary online shopping.
- Set rules to restrict phone access in certain situations (e.g., keeping the phone away from the bed).

Money serves as a critical tool for economists to monitor and analyze economic activity.
Specifically, Jevons’ money par excellence provides a clearer perspective on economic transactions.
By studying the flows of money, economists can outline a significant portion of economic activity in an economy using a circular flow diagram.

In an economy with money as defined by Jevons, economists can track transactions effectively.
The economy is characterized as a circular flow of money circulating among economic actors.
Although monetary flows do not encapsulate all components contributing to living standards, they remain an effective means to gauge economic activity.

The expression “Every dollar you spend is someone else’s income” highlights the interconnectedness of economic activities.
When consumers spend money in exchange for goods or services, it constitutes revenue for a company, which is then utilized for profit distribution and cost coverages (e.g., salaries for workers).
Workers subsequently use their income for further transactions that contribute to income for others.
Effect of Payment Innovation on Economy:
- Innovations (checks, debit/credit cards, Apple Pay) improve transaction efficiency, generally increasing the frequency/velocity of money.
- Exceptions may occur, such as in deflationary economies where velocity is low, reducing the impact of new payment methods.

Individuals receive income and pay taxes on that income.
Disposable Income:
- Defined as income remaining after taxation.
With disposable income, households can choose either:
- Consumption: Spending on goods/services.
- Saving: Retaining unspent income, which includes saving account balances or financial investments (e.g., stocks/bonds).
The financial system plays a crucial role in directing savings toward investments, with 'investment' in economics being distinct from its usage in finance.

Households decide how to manage after-tax disposable income through:
- Consumption: Transacting to exchange labor’s added value for personal living standards and wants.
- Saving: Ensuring the purchasing power of savings does not depreciate, ideally increasing in value over time.

Domestic businesses may import foreign products or equipment, leading to money flowing out of the national economy.
Conversely, exporting domestically manufactured products allows money to flow into the economy.
A growing domestic economy attracts foreign investor interest, leading to the inflow of foreign money into financial markets.
Domestic investments may also flow out if investors pursue opportunities abroad.

Represents net money flows in and out of an economy, providing insights into economic interactions and financial health.