Ch. 3: Optimization Flashcards
Behavioral Economics
- Analyzes the economic and phycological factors that explain human behavior,
- Explains why people optimize in some situations and fail to optimize in others.
- The study of situations in which people act in ways that do not appear to be economically rational
Optimum
The best feasible choice, lowest part on a graph
the complexity of optimizing centers around trade-offs
Marginal Analysis (differences)
- Compares the consequences—costs and benefits—of doing one step more of something.
- Decision analysis that involves comparing marginal costs and marginal benefits to determine the best course of action
- Calculates change in marginal comparison between options
- Evaluates the change in utility that would result from selecting one option over another option
- Optimizing in differences
Marginal Cost
The extra cost generated by moving from one feasible alternative to the next feasible alternative.
Principle of Optimization at the Margin
States that an optimal feasible alternative has the property that moving to it makes you better off and moving away from it makes you worse off.
Normative analysis
The advice an economist gives people how to better optimize
An optimizer maximizes total net benefit when:
Choosing more of one good and less of another no longer increases net benefit.
Comparative statics
- When we evaluate outcomes both before and after a change in some variable
- Ex: You might make a different choice in where you eat lunch on a daily basis after you get a raise. This comparison of restaurant choice, given a change in income, is comparative statics.
Redundancy
Having a backup system or item in place in case the primary system or item fails
Total Value (Levels)
- Calculates total value of every feasible option
- When you select the option that generates the highest total benefit
- Optimizing in levels
Marginal Benefit is positive but falling…
the total benefit will rise at a decreasing rate
Marginal benefit is negative then…
total benefit falls
