Ch. 3 Optimization: Doing the Best You Can

Difference between marginal values and average values

Marginal values show the additional benefit/cost from consuming an additional unit of a good, while average values are the benefit/cost per unit of a good

Optimization in differences

Calculates the change in net benefits when a person switches from one alternative to another and then uses these marginal comparisons to choose the best alternative

Optimization in levels

Calculates the total net benefit of different alternatives and then chooses the best alternative

Comparative statics

Comparison of economic outcomes before and after some economic variable is changed; change in outcome (consumption) from a change in a factor (price)

Positive analysis

Describes what people actually do (objective and fact based, not always correct but can be tested)

Marginal cost

Extra cost generated by moving from one feasible alternative to the next feasible alternative

Normative analysis

Recommends what people ought to do, subjective and value based

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

Does the principle of optimization imply that people always make the best choices?

Yes, it is a good approximation for the decisions people make

Economists mostly use optimization in differences, as opposed to optimization in levels, because...

comparing different features of alternatives is simple

Marginal analysis

cost-benefit calculation that studies the difference between a feasible alternative and the next feasible alternative