Neoclassical economics is a supply-and-demand approach to economics, based on the assumption that individuals make rational decisions amid competing outcomes, firms seek to maximize profits, and individuals act independently with complete and relevant information. It explains the allocation of scarce resources among competing ends through value and price. Neoclassical economics has had a profound impact on economic thought and is the most widely taught theory of economics.
Developed in the late 19th century, neoclassical economics is a supply-and-demand approach to economics. Contrary to previous theories, neoclassical economics views economics as the study of the allocation of resources between competing uses or purposes. It differs from other economic philosophies by the fundamental assumptions it makes about economics and economic behavior. The neoclassical school of economics assumes that individuals make rational decisions amid competing outcomes, that firms seek to maximize profits while individuals maximize satisfaction or happiness, and that individuals act independently and possess complete and relevant information. Collectively, theories based on these assumptions explain the allocation of scarce resources among competing ends and comprise neoclassical economics.
Value and price are used by neoclassical economists to explain the workings of supply and demand. In the neoclassical view, individuals have unlimited desires that collide with scarcity. The decisions that individuals and businesses must make as they seek to maximize satisfaction or profits are shaped in the marketplace by the actions of supply and demand to assign value. In neoclassical economics, the value of a good is the satisfaction it brings to the individual. Price is the mechanism that determines how and whether to reconcile the conflicting needs of businesses and individuals.
For example, an individual may want to buy a car at a certain price. Others may even want to buy the same car for the same price. Regardless, manufacturers may be unwilling or unable to produce as many cars as consumers want at that price point. Consumer frustration begins to drive up the price of cars until some potential buyers drive themselves out of the market by deciding that the satisfaction they would get from owning the higher priced car doesn’t justify the cost to them. The value of the car to the buyer decreases as the price changes. By weeding buyers out of price and value changes, supply and demand are matched.
Since its inception as an 18th-century successor to classical economic theory, neoclassical economics has had a profound impact on economic thought. His emphasis on mathematics and models as the basis of economic theory has been central to the formation of modern economies. Today, much of what is taught in university microeconomics and macroeconomics courses derives from neoclassical economic analysis. Neoclassical economics has become the most widely taught theory of economics.
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