CandleFocus Glossary Editor
Neoclassical economics is a body of economic thought based on the theories of classical economists, such as Adam Smith and David Ricardo. Neoclassical economic theory is a combination of two principles: the concept of economic agency, the notion that consumers and business owners behave in a rational and self-interested manner to achieve the maximum benefit for themselves; and the idea of equilibrium, in which price, supply and demand are equal in a given market. It is built on the assumption that economic behavior is independent and predictable.
The most fundamental principle of neoclassical economics is that prices of products and services are determined primarily by the forces of supply and demand. If demand increases while supply stays the same, prices will rise, and if supply increases while demand stays the same, prices will fall. The neoclassical approach also argues that the actual cost of production is secondary to the demands of the market: when supply meets demand, the price of a product or service will reflect the total value that it can generate for consumers, rather than simply its production costs.
The idea of economic surplus is an important concept in neoclassical economics. This refers to the difference between the actual cost of production and the final retail price of a product or service. This gap has implications not only for businesses and entrepreneurs, but also for governments, as it affects the way policy is made, for example, in terms of taxes or subsidies.
Neoclassical economics has been criticized for its reliance on assumptions about the behavior of consumers and the markets, for example, its emphasis on the concept of rational behavior and the idea of perfect information in the markets. Critics argue that these assumptions don't account for other factors, such as limited information, resource inequality, or emotional thinking, which can affect economic decisions.
Despite these criticisms, neoclassical economics remains the predominant school of thought in modern economics. The theories and principles of this approach are widely used in government and academic circles, and its implications are often seen in industry and business operations, including the way financial institutions operate and governments regulate markets.
The most fundamental principle of neoclassical economics is that prices of products and services are determined primarily by the forces of supply and demand. If demand increases while supply stays the same, prices will rise, and if supply increases while demand stays the same, prices will fall. The neoclassical approach also argues that the actual cost of production is secondary to the demands of the market: when supply meets demand, the price of a product or service will reflect the total value that it can generate for consumers, rather than simply its production costs.
The idea of economic surplus is an important concept in neoclassical economics. This refers to the difference between the actual cost of production and the final retail price of a product or service. This gap has implications not only for businesses and entrepreneurs, but also for governments, as it affects the way policy is made, for example, in terms of taxes or subsidies.
Neoclassical economics has been criticized for its reliance on assumptions about the behavior of consumers and the markets, for example, its emphasis on the concept of rational behavior and the idea of perfect information in the markets. Critics argue that these assumptions don't account for other factors, such as limited information, resource inequality, or emotional thinking, which can affect economic decisions.
Despite these criticisms, neoclassical economics remains the predominant school of thought in modern economics. The theories and principles of this approach are widely used in government and academic circles, and its implications are often seen in industry and business operations, including the way financial institutions operate and governments regulate markets.