Neoclassical economics

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Neoclassical economics is a trend in economics, also called subjective-marginalistic, dominating from the 70s of the 19th century to the 30th century of the 20th century. Achievements of this direction are min; developing the theory of demand, supply and consumer, creating the theory of market equilibrium and the balance between global demand and global supply ; introduction of differential calculus allowing for the study of dependencies between economic phenomena through the so-called limit values.

The output of this trend arose simultaneously in three economic schools: the Anglo-American School represented by William Stanley Jevons, John Bates Clark and later by Alfred Marshall ; School of Lausanne - Mathematics, whose creator was Leon Marie Walras, and the representative was Vilfredo Pareto and the Austrian Psychological School, whose creator Carl Menger. The book by Carl Menger Principles of Economics published in 1871 revived the scholastic approach to economics. It was also a pillar of the so-called "marginalist revolution" in the history of economic sciences. Menger included three main theses in his publication:

  • The theory of needs - Human are characterized by the fact that they still need something. All theoretical and economic research begins with the realization of this fact. Satisfying these needs is the ultimate goal of the human economy. Individual needs are generally transformed into general social needs.
  • The theory of economic goods - It concerns the human-to-thing relation. A thing is good if it has the capacity to meet the needs of the individual and is available. Goods are divided into those to which access is unlimited, and for economic goods that are rare and are in a certain amount.
  • Economic theory of social institutions - this is an innovative theory describing social institutions. Hayek later developed this thought. Menger noted that social institutions arise as a result of human action and interaction, as a result of a social process composed of various human behaviors (Janik M. p. 49, 53, 56)

Classical and neoclassical economics

This direction focused its research on what was omitted by the classical economy, which focused on the supply, namely how utility or consumer preferences can be translated into the demand for goods. The extreme utility theory complemented the theory of the market mechanism. In neoclassical economics for the first time, mathematics and econometrics have been applied, allowing for measuring, for example, such quantities as total domestic production and total income. An important achievement of this direction was the creation of the so-called Optimum Pareto, or the condition of optimal allocation of resources, which states that a situation in which no member of the community can improve his situation without simultaneously deteriorating the situation of at least one other member of the community.

Assumptions of the neoclassical economics model

This model, also called standard, explains the behavior of entities in economies. Assumptions contained in it determine:

  • rationality of units,
  • actions based on accurate and complete information and unlimited possibility of its processing,
  • the goal of maximizing profits in companies and maximizing the expected utility for consumers,
  • activities that are included in a narrow sense - without taking into account the usability of the environment,
  • making decisions, which is based on the inference rule acc. the Bayesian,
  • consistent preferences (e.g. temporary), according to the exponentially discounted usability model,
  • the treatment of income and variable resources as unspecified for their purpose or origin (Solek A. p. 22)

Perfect competition model

In neoclassical economics, the concept of a model economy governed by perfect competition developed. This model is an appropriate way to assess the effectiveness of competition in the real world. According to neoclassicals, real competition in the range it differs from the model is undesirable and even harmful. The perfect competition is based on four main assumptions made by Frank Knight.

  • There are infinitely many entrepreneurs in the economy, however, each of them has a small share in the production of the entire branch,

The product should be homogeneous,

  • Information about a given product between buyers must be perfect,
  • There are no entry and exit barriers on the market.
  • The market is perfectly competitive if it meets all of these assumptions. If at least one of these conditions is not met, then we deal with monopolistic competition or oligopoly.

According to the first assumption, individual activities of the entrepreneur in the change of the supply volume will not affect the price of the given good. Therefore, the demand curve for such an enterprise is a horizontal straight line. If the company raised the price of this good, consumers would start to buy products from the competition. After lowering the price, compared to the established market price, the entrepreneur would have achieved a lower profit, because after just the market price you can sell an infinite number of products.

The second assumption tells us that the features of goods produced on the market should be the same. In this situation, consumers do not look at who they buy the good from.

Thanks to the third assumption, the consumer knows that products from different sources are really the same.

Lack of barriers to entry and exit means that if entrepreneurs limited the total supply of a specific product, increasing its price, it would be a stimulus for others to enter the market and through competitive activity set prices so that they equal the previous level.

Model of LM Walras

Another significant achievement of the neoclassical economics was the development by LM Walras of a mathematical model expressing the state of general equilibrium. This model assumes the functioning of an economy consisting of two sectors, i.e. enterprises and households, not taking into account the role of the state or foreign trade, with unchanged production technique and full employment. Enterprises operate under conditions of perfect competition, while households, with constant incomes and unchanged preferences, report demand for consumer goods in sizes determined by the sum of incomes earned from their production factors. This mechanism assumes that changing one of the factors causes changes of others. A change in the price of one of the products will change the structure of production, and this will entail a change in the demand for inputs, which will result in a change in the distribution of income. The greatest merit of Walras was to show in this model the mutual dependence of all prices and all quantities of resources. Another point of the neoclassical economics is the development by JB Clark of the theory of marginal productivity of production factors, which has become the tool of many modern models of effective allocation of resources.

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