Neoclassical economics

Neoclassical economics refers to a general approach (a "metatheory") to economics based on supply and demand which depends on individuals (or any economic agent) operating rationally, each seeking to maximize their individual utility or profit by making choices based on available information. Mainstream economics is largely neoclassical in its assumptions. There have been many critiques of neoclassical economics, both from within orthodox economics, and from outside of it, and often these critiques have been incorporated into new versions of neoclassical theory.

Overview

Neoclassical economics is the grouping of a number of schools of thought in economics. There is not complete agreement on what is meant by neoclassical economics, and the result is a wide range of neoclassical approaches to various problem areas and domains -- ranging from neoclassical theories of labor to neoclassical theories of demographic changes.

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As expressed by E. Roy Weintraub, neoclassical economics rests on three assumptions, although certain branches of neoclassical theory may have different approaches:

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• People have rational preferences among outcomes that can be identified and associated with a value.
• Individuals maximize utility and firms maximize profits.
• People act independently on the basis of full and relevant information.

From these three assumptions, neoclassical economists have built a structure to understand the allocation of scarce resources among alternative ends -- in fact understanding such allocation is often considered the definition of economics to neoclassical theorists. Here's how William Stanley Jevons presented the basic problem of economics:

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:Given, a certain population, with certain needs and powers of production, in possession of certain lands and other sources of material: required, the mode of employing their labour which will maximize the utility of their produce.

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From the basic assumptions of neoclassical economics comes a wide range of theories about various areas of economic activity. For example, profit maximization lies behind the neoclassical theory of the firm, while the derivation of supply curves leads to an understanding of consumer goods, and the demand curve allows an analysis of the factors of production. Utility maximization is the source for the neoclassical theory of consumption, the derivation of demand curves for consumer goods, and the derivation of factor supply curves and reservation demand.

Related Topics:
Theory of the firm - Supply - Consumer good - Demand - Factors of production - Reservation demand

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Neoclassical economics emphasizes equilibria, where equilibria are the solutions of individual maximization problems. Regularities in economies are explained by methodological individualism, the doctrine that all economic phenomena can be ultimately explained by aggregating over the behavior of individuals. The emphasis is on microeconomics. Institutions, which might be considered as prior to and conditioning individual behavior, are de-emphasized. Economic subjectivism accompanies these emphases. See also general equilibrium.

Related Topics:
Methodological individualism - Individual - Microeconomics - Economic subjectivism - General equilibrium

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