what is neoclassical economics 
neoclassical economics is a broad theory that focuses on supply and demand as the driving forces behind the production pricing and consumption of goods and services it emerged in around 1900 to compete with the earlier theories of classical economics one of the key early assumptions of neoclassical economics is that utility to consumers not the cost of production is the most important factor in determining the value of a product or service this approach was developed in the late 19th century based on books by william stanley jevons carl menger and l on walras neoclassical economics theories underlie modern day economics along with the tenets of keynesian economics although the neoclassical approach is the most widely taught theory of economics it has its detractors understanding neoclassical economicsneoclassical economics emerged as a theory in the 1900s 1 neoclassical economists believe that a consumer s first concern is to maximize personal satisfaction also known as utility therefore they make purchasing decisions based on their evaluations of the utility of a product or service this theory coincides with rational behavior theory which states that people act rationally when making economic decisions in other words people make a logical choice between two options based on their perception of which one is better for them further neoclassical economics stipulates that a product or service often has value above and beyond its production costs while classical economic theory assumes that a product s value derives from the cost of materials plus the cost of labor neoclassical economists say that consumer perceptions of the value of a product affect its price and demand 2finally this economic theory states that competition leads to an efficient allocation of resources within an economy the forces of supply and demand create market equilibrium in contrast to keynesian economics the neoclassical school states that savings determine investment it concludes that equilibrium in the market and growth at full employment should be the primary economic priorities of government these principles can be summed up in three assumptions that underpin neoclassical economic theory criticisms of neoclassical economicscritics of neoclassical economics believe that the neoclassical approach cannot accurately describe actual economies they maintain that the assumption that consumers behave rationally in making choices ignores the vulnerability of human nature to emotional responses neoclassical economists maintain that the forces of supply and demand lead to an efficient allocation of resources other critiques of neoclassical economics include some critics also blame neoclassical economics for inequalities in global debt and trade relations because the theory holds that labor rights and living conditions will inevitably improve as a result of economic growth neoclassical economics in the real worldneoclassical economic theory is important because of how it affects both markets and economic policy the principles of neoclassical economics can be used by companies to set prices and grow their business a business that understands neoclassical economics for example won t just look at the cost of making a product when setting a price it will also consider what competitors are charging what customers are willing to pay and how to use branding to increase what customers are willing to pay a savvy business owner for example could create a marketing campaign that positions their product as the favorite choice of popular figures on social media by influencing customer perception of their brand the business will be able to charge more for their products governments and banks can also follow neoclassical principles which will impact economic policy and market regulation followers of neoclassical economics believe that there is no upper limit to the profits that can be made by smart capitalists since the value of a product is driven by consumer perception this difference between the actual costs of the product and the price it is sold for is termed the economic surplus this type of thinking was evident in the lead up to the 2008 financial crisis modern economists believed that synthetic financial instruments had no price ceiling because investors in them perceived the housing market as limitless in its potential for growth as a result many investment banks and lenders continued to grow the market for subprime mortgages assuming that continued growth in the market would prevent investment instruments that included these mortgages from losing value 4 these financial instruments were mostly unregulated by the federal government allowing lenders and investors to drive growth in the subprime mortgage market 5both the economists and the investors were wrong and the market for those financial instruments crashed the housing market did eventually stop growing and begin to decline subprime lenders found themselves underwater on mortgages that they could not afford they began to default in large numbers 6 this not only left huge numbers of borrowers unable to afford their homes but it also undermined the stability of the banks and lenders who had backed their mortgages 7 the entire global economy suffered and required government intervention to stabilize 