Neoclassical Economics
Origins & Key Thinkers
Neoclassical economics emerged in the late 19th century, building on classical economics while introducing marginal analysis and mathematical rigor. Key figures include William Stanley Jevons, Carl Menger, and Léon Walras, who independently developed the marginal utility theory—the idea that value is determined by individual preferences and diminishing additional satisfaction (marginal utility) from consuming more of a good.
Core Assumptions
- Rational Decision-Making – Individuals and firms are rational agents who aim to maximize utility (consumers) and profit (producers).
- Marginalism – Economic decisions are made at the margin, meaning that small changes influence choices.
- Equilibrium – Markets tend toward a state where supply and demand balance, setting prices efficiently.
- Perfect Competition – In an ideal market, no single buyer or seller can influence prices, and all agents have perfect information.
Key Theories
- Utility Maximization – Consumers allocate resources to maximize satisfaction.
- Profit Maximization – Firms produce goods where marginal cost equals marginal revenue.
- General Equilibrium (Walrasian Economics) – The economy as a whole can reach a state where all markets clear, meaning no excess supply or demand.
Criticism & Evolution
While influential, neoclassical economics has been criticized for unrealistic assumptions like perfect information and rational behavior. In response, behavioral economics challenges the idea of rational decision-making, while New Keynesian economics integrates market imperfections.
Impact
Neoclassical economics remains the foundation of modern mainstream economics, influencing policies on pricing, competition, and market efficiency. It underlies microeconomic theory and is widely used in business, finance, and public policy.
Follow-up Questions
Q. Why was neoclassical economics needed after classical economics?