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    The First Principle of Economics: Optimization

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    Ceyp Inem Cali
    1. The first principle of economics is optimization, which means that people make choices that maximize benefits relative to costs, given the available information and constraints. 2. Equilibrium occurs when no individual can benefit from changing their behavior, because everyone is already optimizing their choices. 3. Empiricism is the third principle of economics, which is the analysis of data to test theories and determine causal relationships in the world.

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    The First Principle of Economics: Optimization

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    Ceyp Inem Cali
    37 views1 page
    1. The first principle of economics is optimization, which means that people make choices that maximize benefits relative to costs, given the available information and constraints. 2. Equilibrium occurs when no individual can benefit from changing their behavior, because everyone is already optimizing their choices. 3. Empiricism is the third principle of economics, which is the analysis of data to test theories and determine causal relationships in the world.

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    excelente

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    Macro acemoglu 6

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    1. The first principle of economics is optimization, which means that people make choices that maximize benefits relative to costs, given the available information and constraints. 2. Equilibrium occurs when no individual can benefit from changing their behavior, because everyone is already optimizing their choices. 3. Empiricism is the third principle of economics, which is the analysis of data to test theories and determine causal relationships in the world.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    37 views1 page

    The First Principle of Economics: Optimization

    Uploaded by

    Ceyp Inem Cali
    1. The first principle of economics is optimization, which means that people make choices that maximize benefits relative to costs, given the available information and constraints. 2. Equilibrium occurs when no individual can benefit from changing their behavior, because everyone is already optimizing their choices. 3. Empiricism is the third principle of economics, which is the analysis of data to test theories and determine causal relationships in the world.

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    Download as pdf or txt
    of 1

    Optimization is the first principle of economics.

    Economists
    believe that optimization explains most of our choices, including
    People make choices that are 1.1
    minor decisions like accepting an invitation to see a movie, and
    ­motivated by calculations of benefits major decisions like deciding whom to marry.
    2. Equilibrium: The second principle of economics holds
    and costs. 1.2
    that economic systems tend to be in equilibrium, a situation
    in which no agent would benefit personally by changing his
    Equilibrium is the special situation or her own behavior. The economic system is in equilibrium
    in which everyone is simultaneously when each agent feels that he or she cannot do any better by picking another course 1.3
    optimizing, so nobody would benefit of action. In other words, equilibrium is a situation in which everyone is simultane-
    personally by changing his or her ously optimizing.
    own behavior.
    3. Empiricism: The third principle of economics is an emphasis on empiricism—analysis
    1.4
    Empiricism is analysis that uses data. that uses data or analysis that is evidence-based. Economists use data to test theories and to
    Economists use data to test theories determine what is causing things to happen in the world.
    and to determine what is causing
    things to happen in the world. 1.5

    1.3 The First Principle of Economics: 1.6

    Optimization
    Let’s now consider our first principle in more detail. Economics is the study of choices, and
    economists have a theory about how choices are made. Economists believe that economic
    agents try to optimize, meaning that economic agents try to choose the best feasible op-
    tion, given the information that they have. Feasible options are those that are available and
    affordable to an economic agent. If you have $10 in your wallet and no credit/debit/ATM
    cards, then a $5 Big Mac is a feasible lunch option, while a $50 filet mignon is not.
    The concept of feasibility goes beyond the financial budget of the agent. There are many
    different constraints that determine what is feasible. For instance, it is not feasible to work
    more than 24 hours in a day. It is not feasible to attend meetings (in person) in New York
    and Beijing at the same time.
    The definition of optimization also refers to the information available at the time of the
    choice. For example, if you choose to drive from San Diego to Los Angeles and your car
    is hit by a drunk driver, you are unlucky but you haven’t necessarily failed to optimize. As
    long as you made your travel plans taking into account the realistic risk of a car crash, then
    you have optimized. Optimization means that we weigh the potential risks in a decision, not
    that we perfectly foresee the future. When someone chooses the best feasible option given
    the information that is available, economists say that the decision maker is being rational
    or, equivalently, he or she is exhibiting rationality. Rational action does not require a crystal
    ball, just a logical appraisal of the costs, benefits, and risks associ-
    ated with each decision.
    On the other hand, if you decide to let a friend drive you from
    In the cases where agents fail to San Diego to Los Angeles and you know that your friend has just
    ­optimize, normative economic had a few beers, this is probably a case in which you failed to
    ­analysis can help them realize their optimize. It is important to note that the test of optimization is the
    quality of your decision, and not the outcome. If you arrive at your
    mistakes and make better choices destination without a crash, that would still (probably) be a subop-
    in the future. timal choice, because you got lucky despite making a bad decision.
    We devote much of this book to the analysis of optimization.
    We explain how to optimize, and we discuss lots of evidence that
    supports the theory that economic agents usually optimize. We also discuss important cases
    where behavior deviates from optimization. In the cases where agents fail to optimize,
    normative economic analysis can help them realize their mistakes and make better choices
    in the future.
    Finally, it is important to note that what we optimize varies from person to person and
    group to group. Although most firms try to maximize profits, most economic agents are not

    Section 1.3 | The First Principle of Economics: Optimization 39

    M01_ACEM0635_01_GE_CH01.indd 39 17/03/15 12:39 PM

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