Neoclassical economics focuses on supply and demand, assuming individuals make rational decisions and firms seek to maximize profits. Value and price are used to explain how supply and demand work, with price reconciling conflicting desires. Neoclassical economics has had a profound impact on economic thought and is widely taught in university courses.
Developed in the late 19th century, neoclassical economics is an economic approach focused on supply and demand. In contrast to earlier theories, neoclassical economics sees economics as the study of the allocation of resources among competing uses or ends. It is distinguished 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 among competing outcomes, that firms seek to maximize profits while individuals maximize satisfaction or happiness, and that individuals act independently and have complete and relevant information. Collectively, theories based on these premises explain the allocation of scarce resources among competing ends and comprise neoclassical economics.
Value and price are used by neoclassical economists to explain how supply and demand work. In the neoclassical view, individuals have unlimited wants that collide with scarcity. The decisions that individuals and companies must make in seeking 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 the conflicting desires of companies and individuals can be reconciled.
For example, an individual might want to buy a car at a certain price. Others may also 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 this price point. Consumer frustration begins to drive up the price of cars until some potential buyers drive themselves out of the market, deciding that the satisfaction they would get from purchasing the car at a higher price does not justify the cost to them. The value of the car to the buyer decreases as the price changes. By eliminating buyers for changes in price and value, demand and supply are brought into agreement.
Since its inception as a successor to the eighteenth-century theory of classical economics, neoclassical economics has had a profound impact on economic thought. His emphasis on mathematics and models as the basis of economic theory has been fundamental to the formation of modern economies. Today, much of what is being taught in university courses in microeconomics and macroeconomics is derived from neoclassical economic analysis. Neoclassical economics became the most widely taught theory of economics.
Asset Smart.
Protect your devices with Threat Protection by NordVPN
