A rational decision-maker takes action if and only if the marginal benefit of the action exceeds the marginal cost. People Respond to Incentives Behavior changes when costs or benefits change. By trading with others, people can buy a greater variety of goods or services. The opposite of this is economic activity that is organized by a central planner within the government. When a market fails to allocate resources efficiently, the government can change the outcome through public policy.
Examples are regulations against monopolies and pollution.
Countries whose workers produce a large quantity of goods and services per unit of time enjoy a high standard of living. Similarly, as a nation's productivity grows, so does its average income. When a government creates large quantities of the nation's money, the value of the money falls. As a result, prices increase, requiring more of the same money to buy goods and services. This tradeoff is crucial for understanding the short-run effects of changes in taxes,government spending and monetary policy.