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Analysis of The Neo Classical Theory of Economics - Research Paper Example

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 This paper discusses the classical theory of economics. The paper analyses the concept that the price of a product is not decided by the cost of production of the product. The paper considers factors that affect the decision of an individual which in turn will also affect the economic condition…
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Analysis of The Neo Classical Theory of Economics
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Download file to see previous pages The Neoclassical theory of economics introduced the concept of maximizing profits or utility as the base cause for the rational decisions made by man. The economic man acts rationally so as to maximize the gains out of the action. In the case of individuals, the utility of the product decides on the price and the market value of the product. In the case of the companies, it is the profitability of the company that would be the deciding factor. Another leading concept behind the neo-classical theory is that it also accepted the fact that the individuals will act independently and their perception of what is profitable to them might vary. William Stanley Jevons (1871) in his seminal work, The Theory of Political Economy says, 'Given, a certain population, with certain needs and powers of production, in possession of certain lands and other sources of material: required, the mode of employing their labour which will maximize the utility of their produce.'
The neo-classical was influenced by the thoughts of a number of economists of the twentieth century and the behavioral economics was adopted by the majority in lieu of the neo-classical. A modified version of this is termed the new classical economic theory and most of the current day work on economics is based on these principles. The new classical theory takes into consideration various factors that make up the economic decision making of the individuals (Emma Dawnay & Hetan Shah Jul 2005). It takes into account the behavior and choice of people based on various reasons not necessarily controlled by the sense of maximizing their utility or their value or their returns.
Statement and its implications
The statement brings to the forefront of the seven basic principles that differentiate the new classic economic theory from the neoclassical one. However, this theory accepts the fact that economics is one of choice and preference. The logic of preference or economic decisions is controlled by the market prices, the return to the person or the company is going to get out of it and finally the allocation of resources. Apart from these, the decisions are made based on a number of factors that are more behavior oriented rather than economics directed. Information flow in the market place affects the market price and creates a trend in the market. Information in today's world also has an impact on the economic behavior of nations. Behavior and psychology of a person have an effect on the decisions that are made by him. ...Download file to see next pages Read More
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