Question

1)In which areas does classical economics and neoclassical economics differ in which are similar? Explain precisely.

Answer 1

The initial theory of economic thought first developed by Adam Smith (Wealth of Nations, 1777) is classical economics. This sets out several concepts of economics which the neo-classical school was then to build on. Neo-classical school is the present-day dominant branch of microeconomic thought. Classical economics refers at the theory of production and distribution: goods and services are priced at the expense of producing them (labour-value theory).

Neo-classical economics, as it focuses on the importance buyers and businesses put on the good instead of assuming that costs are calculated by the expense to produce the good. As such, it looks at supply-demand dynamics in a market. Classical economics was still very similar to social science while neoclassical economics introduced several ideas that made the discipline more "scientific."

The fundamental idea of classical theory is that the economy self-regulates. This is focused primarily on the theory of value, and the theory of distribution. An economy's production or commodity was assumed to be divided or distributed among the different social classes according to the costs in generating the production borne by those classes. Classical economists are of the view that prices, wages and rates are adjustable, and that markets are often open. While there is no unemployment, growth depends on providing factors in output.

Neoclassical economics believes people have reasonable aspirations and aim to optimize their usefulness. This school believes people are behaving independently on the basis of all the knowledge they can receive. Neoclassical school is related to the philosophy of marginalism and optimizing utilitarian utility, as well as the notion that economic agents behave on the basis of reasonable expectations. Because neoclassical economists assume the economy is still in equilibrium, the focus of macroeconomics is on the growth of supply factors and the effect of money supply on price rates.