Neoclassical Economics Term Paper

Under neoclassical economics specialists usually understand   approach to economics which correlates demand and supply with individual ability to maximize profit. This approach to economics makes an accent on the use of mathematical equations in the economic study.

Originally this approach was introduced and developed in the late nineteenth century. The term itself was introduced by Thorstein Veblen. William Stanley Jevons, Carl Menger and Leon Walras later developed this approach.

At the present moment neoclassical economics became one of the popular trends of economics.  The term neoclassical economics is usually used to define mainstream economical trend. Despite its wide popularity and acceptance there are specialists who criticize this school.

In neoclassical economics strong accent is made on the study of allocation of resources. In general economics her is regarded as: “The study that considers human behavior as a relation between scarce means and alternative ends” (McCain).  Neoclassical specialists usually demonstrate positive approach to problems. They believe that free markets will finally result in the most effective allocation of resources.

Specialists in this field believe that interference of the state should be minimized for the most effective allocation.  Neoclassical economists believe that improving the allocation of resources is one of the main ways to improve the wellbeing of people.

There are three basic assumptions in neoclassical economics. The first assumption describes individual behavior.  It is based on  the idea that “socio-economic explanation must be sought at the level of the individual agent” (Arnsperger 2). In other words, neoclassical economists believe that people have rational preferences of outcomes. They believe that people make choices which can give them the best advantages. According to this assumption deviation from rational behavior are seldom and unnatural. Neoclassical economists underline that not necessarily all people behave rationally. In broader definition of neoclassical economic theory specialist underline that people behave in the way which give most advantages, but these advantages are defined by their individual values. It is important to remember that economical system functions as if people were rational. The second assumption of neoclassical economics states that individuals have inclination to maximize utility while firms and organizations want to maximize profit.  “All behavior is preference-driven or, more precisely, it is to be  understood as a means for maximizing preference-satisfaction” (Arnsperger 3).  The third basis assumption of neoclassical economics states that individuals act independently even when they possess full knowledge of this situation. This way predictions become a problematic issue.

Despite neoclassical economics is one of the most popular and widespread economic theories of our time is still has opponents. Those who do not support this form of economics state that it often turns to unrealistic assumptions which have little connection with reality. For instance, neoclassical economics is based on the assumption that people behave rationally but there are a lot of situations when people manifest irrational behavior. In addition, some specialists believe that rational search for profit is used by neoclassical economists to justify egoistic approach of people. Some specialists argue that there is no  necessity to regulate labor rights. Neoclassical economists believe that labor rights  will improve automatically with the development of economic changes. At the present moment this does not happen and certain inequalities in global debt and trade relations.

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