The new classical school model of economics, on the other hand seeks to succeed the general theory by attempting to disambiguate some of the assumptions that sustain the Keynesian theories of microeconomics. The new theory seeks to develop a clear explanation by majoring on rational and self-interested agents of economics in developing effective market competitions. This is unlike the general theory, which assumes non-rational and non-optimizing behaviors of the very agents in constructing market structures and economic conditions. In doing this, the new classical school theory has three main assumptions in explaining effective market clearance mechanisms.
The three assumptions include the rational expectations, the continuous market clearance and the aggregate supply hypothesis. Rational expectations demand that producers have rational expectations of the market when determining their future operations. This includes both weak and strong expectations that should help market players trim their expectations especially on future market trends. Continuous clearance state that the market should have constant activities despite the economic state. This way, the economy stays operational as all economies always are. The activities may slow following weak policies but such should not stall the economy. The assumption creates an active economic situation. The aggregate supply hypothesis investigates the laborers decision making between leisure and work. An effective consideration should result
in the longevity of production by the laborers (Levacic and Rebmann, 1982). Microeconomic factors are specific factors of an industry that influences their operations thus their cash flow; such include allocation, production and distribution. They investigate the role of the factors in the overall operations of an organization and their contribution in sustaining employees. Macroeconomic factors on the other hand are market factors, which equally affects the financial might of an organization. These include aggregate output, employment and inflation. The economists develop a split in the two concepts by alluding that microeconomic factors affect the populace directly thereby influencing their purchasing power while macroeconomic factors affect the business organizations. However, they later reconcile the factors by stating that the economy is a self-sustaining cycle in which every element depends on the other. Furthermore, the two factors have a common market. They thus admit that both the factors affect the financial activity in a market thereby contributing equally to recession. Clower develops a concept he refers to as the dual decision hypothesis in which he investigates the purchasing patterns of most families. He develops the argument from general theory. In the theory, he postulates that families will only purchase products after determining their sources of income. In this theory, Clower investigates the relationship between employment and the purchasing power of a family. The concept of a self-sustaining