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What is neoclassical economics?

A-Level, IB
AQA, Edexcel, OCR, IB, Eduqas, WJEC

Last updated 13 Jul 2023

Neoclassical economics is a mainstream economic theory that emerged in the late 19th century and remains influential today. It represents a revival and modification of classical economic principles developed by economists like Adam Smith and David Ricardo. Neoclassical economics emphasizes the idea of rational decision-making by individuals and firms in a market economy.

Key features of neoclassical economics include:

  1. Rationality: Neoclassical economists assume that individuals and firms are rational actors who make decisions based on their self-interest and attempt to maximize their utility or profits.
  2. Marginal analysis: Neoclassical economics focuses on analyzing decisions at the margin, considering the incremental changes in costs and benefits associated with small changes in production, consumption, or investment.
  3. Supply and demand: Neoclassical economics employs the concept of supply and demand to explain how prices are determined in markets. It argues that the equilibrium price and quantity are reached where supply and demand intersect.
  4. Utility theory: Neoclassical economics employs the concept of utility to explain individual preferences and decision-making. It assumes that individuals seek to maximize their utility, which is a measure of satisfaction or well-being derived from consuming goods and services.
  5. Efficiency: Neoclassical economics places a strong emphasis on market efficiency, arguing that competitive markets lead to an efficient allocation of resources and maximize overall social welfare.
  6. Methodology: Neoclassical economists often use mathematical models and formal analysis to study economic phenomena and make predictions about economic outcomes.

It is important to note that neoclassical economics has been subject to various critiques and alternative schools of thought have emerged, such as behavioral economics and institutional economics, which challenge some of its assumptions and offer different perspectives on economic analysis.

Neoclassical economics has been influential in economics and has been used to analyze a wide range of economic phenomena. However, it has also been criticized for being too simplistic and for ignoring the role of institutions and power in the economy.

Here are some of the key figures in neoclassical economics:

Alfred Marshall: Marshall was an English economist who is considered to be the founder of neoclassical economics. He developed the concept of marginal analysis and wrote the influential book Principles of Economics.

Leon Walras: Walras was a Swiss economist who developed the general equilibrium theory. This theory is a mathematical model of how markets interact and reach equilibrium.

William Stanley Jevons: Jevons was an English economist who developed the theory of marginal utility. This theory is the basis for the neoclassical assumption that individuals make decisions based on their utility.

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