makes sense given their time and financial constraints. Similarly, they sell
products, including their own labour services, in an attempt to improve
their own economic situation.
When making such decisions about what to buy or sell and at what
prices, people respond to incentives. Sellers usually want to sell more
when prices are high because by doing so they will be able to afford more
of the things they want. Similarly, buyers usually want to buy more when
prices are low because by doing so they are better able to use their scarce
resources to acquire the many things they desire.
With self-interested buyers and sellers responding to incentives when
determining what they want to buy and sell, the overall market prices and
quantities are determined by their collective interactions. Changes in
their preferences or productive abilities lead to changes in their desired
transactions and thus to fluctuations in market prices and quantities.
Of course, individuals are not motivated only by self-interest. For most
people, love, faith, compassion, and generosity play important roles in
their lives, especially at certain times. Behavioural economists devote
their research to better understanding how these motivations influence
individuals’ economic behaviour. But none of this detracts from the
importance of understanding the crucial role played in a modern
economy by incentives and self-interest.
1 Throughout this book, we encounter many great economists from the past whose ideas shaped
the discipline of economics. At the back of the book you will find a timeline that begins in the