Economics, Standing on One Foot?
By Arnold Kling
Economics consists of exactly two ideas: optimization and equilibrium. Optimization is the process by which all economic agents–households, workers, firms, governments–achieve their objectives subject to constraints on their resources. It leads to the familiar condition that an activity is undertaken until its marginal reward equals its marginal cost. Equilibrium is the process by which the competing efforts to optimize by these agents form a stable arrangement. An equilibrium is defined by relative prices, and those prices typically form the basis of either the marginal reward or the marginal cost in the individual agents’ optimization processes. So “seeing the economics” means figuring out what is driving the optimization and equilibrium in a given context.
I think that optimization and equilibrium are two very important concepts in economics. However, I think that they can be over-emphasized. See this essay.