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Neoclassical synthesis was a post-war economic concept which combined the Keynesian macroeconomics and microeconomics of the neoclassical school of thought (Mankiw, 2006). Paul Samuelson personified and popularized the neoclassical synthesis by trying to make a solid mathematical foundation of economics. This has led to the current domination of neoclassical synthesis in mainstream economics. The mainstream economics combines the supply and demand models of markets with Keynesian theory (Mankiw, 2006). It provides that costs and opportunities play an important part in shaping the decision making process of economic agents. For example, the consumer theory of demand is a model of mainstream economics which determines how prices (costs) affect quantity demanded of a particular product. In this case, decision makers (e.g. consumers) will choose products with lower costs or prices; hence affecting quantity demanded.
One of the theoretical assumptions of neoclassical microeconomics is the allocation of scarce resources among unlimited wants. It is assumed that people develop rational preferences of identifiable outcomes that can be valued. Consumers/households maximize utility while firms maximize profits. Provided that they get access to sufficient information, individuals make independent decisions and act independently. Aggregate demand and aggregate supply are the main theoretical foundations of Keynesian macroeconomics (Mankiw, 2006). The IS-LM model is the basic theory of aggregate demand. When these two classes of theoretical foundations (neoclassical microeconomics and Keynesian macroeconomics) are combined, they result in short-run economic fluctuations which form the basis of mainstream economics.
The new neoclassical synthesis borrows the general equilibrium theory from the new classical models. The microeconomic foundations of preferences and constraints also form the basis of the
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For instance, Adam Smith’s theory of the invisible hand argues that when people engage in business and selling they are governed by the invisible hand of the market that helps regulate prices and ensures that businesses and people act in certain ways. Indeed, the nature of economics is like psychology in that it presents theories of human behavior.
As such, economic analysis relates to the study of economic systems in an industry to ascertain the effectiveness of the operations of a given industry with reference to its profitability1. With this, we are able to establish the optimum use of the limited resources to achieve a given economic objective.
Thus, short-run is the time period that quantity of an input or at least one of the many inputs is fixed while other inputs’ quantities can vary. Long-run on the other hand is that time period where inputs in entirety can be varied. Therefore, there is no specific time that can be taken as fixed or even marked on the dates of the calendar to distinguish short-run from the long-run.
If the quantity demanded of a certain product changes minimally or does not change at all, then that product is said to be a Price Inelastic Good. Consequently, if a product whose price increased and such a change brought forth an abrupt drop in quantity demanded of the same product, the good is said to be Price Elastic.
e that the people of a country would receive the best of every thing that could be education, housing, health services or the other various basic necessities.
Economics has been called and is known as a Social Science one that actually focuses on the subject matter that is
resources and maximizes his/her utility by selling it, since the economic problem of scarcity prevails; allocation decisions are made necessary by the market forces. Hence the point of interaction of the consumer’s demand curve and the producer’s supply curve is known as
sought to apply a broader theoretical and conceptual tradition of economic thought by placing emphasis on neo-classical synthesis – a combination of neo-classical economics and Keynesian economics.
Conservative economics is based on Milton Friedman’s teachings and
s the above figure illustrates, if there is a supply shock in an economy (such as increase in the price of oil, labor or other costs that increase the cost of doing business), the short run AS curve shifts to the left. The real GDP decreases from Q to Q’ and the price level