Explain neo-classical microeconomics.

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pohnpei397 | College Teacher | (Level 3) Distinguished Educator

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Neoclassical economics is the theoretical underpinning of essentially all mainstream economics today.  It is the theory that looks to supply and demand to explain things like prices.

Neoclassical economics has three major assumptions.  It assumes that:

  1. People choose between alternatives on a rational basis.
  2. People try to maximize their utility (the benefits they get when compared to the price they have to pay to get those benefits) and firms try to maximize their profits.
  3. People act independently of one another and have access to all relevant information.

These assumptions can, neoclassical economists say, explain economic behavior.  People will spend time and money until the benefits that they get stop outweighing the costs they incur.  Firms will produce goods (or will hire employees) until the the revenue they bring in from each extra unit of production (or each employee hired) is equal to the cost of producing that extra unit (or hiring that final employee).

Thus neoclassical economics is not really a "school" within economics.  Instead, it is the basis of all mainstream economics today.


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