Neoclassical economics is a perspective in economics that proposes that because of the existence of individual rationality, markets will not need to be regulated and will correct themselves through automatic mechanisms. The policy implications of neoclassical economics are laissez-faire goernments and the bare minimum of government interventions such as property rights.
There are three assumptions asserted by E. Roy Weintraub that form the foundation of neoclassical economics. It is important to remember that different neoclassical theories have different approaches. The assumptions are the following:
1. People have rational preferences for outcomes that are associated with value
2. Individuals maximize utility and firms maximize profits
3. People act independently on the basis of full and relevant information
Neoclassical economics has produced different theories and areas of economic activity. An example of one is that profit maximization is related to the neoclassical theory of the firm. The derivation of demand curves describes consumer goods and the supply curve provides an understanding of the factors of production¹. The neoclassical theory of consumption outlines the concept of utility maximization and reservation demand acts as the source for the derivation of demand curves and the derivation of labour supply curves¹.
The overall idea of neoclassical economics is that buyers, to maximize their gains, will increase their purchases of a good until they balance the gain from the extra good with the cost of obtaining it. In this idea, they maximize utility, which is the satisfaction of consuming goods and services. Through mechanisms such as these, any perturbations to an equilibrium will be corrected by the market until it regains pareto efficiency.
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