Economics ECON S - 1941 Study Guide - midterm Guide: Statics
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3. 1 two kinds of optimization: a matter of focus. Economists believe that optimization describes most of the choice that people, households, businesses and governments make. People aren"t perfect optimizers but their behavior is approximated by optimization. Is faster in many cases due to the focus on key differences. The change in focus (from isolated analysis to comparison of differences between options) is all that distinguishes the two techniques. In normal cost-benefit analysis, the decision maker finds the alternative with the highest value of net benefit. Example: when choosing an apartment, rent is a direct cost and commute time to work is an indirect cost. Optimum: best feasible choice (= optimal choice) Three steps of optimization in levels: translate all costs and benefits into common units (like dollars, calculate the total net benefit of each alternative, pick the alternative with the highest net benefit. = comparison of economic outcomes before and after some economic variable is changed.
