Question

In: Economics

Discuss some similarities and differences between the economic ideas of the Classical Economists and the Marginalists?

Discuss some similarities and differences between the economic ideas of the Classical Economists and the Marginalists?

Solutions

Expert Solution

Classical economics can be traced to the days of Adam Smith. Classical economy has a key feature of Full employment in a freely operating market. Equilibrium is achieved if the market tends to fluctuate through adjustment of wages. Investments and savings are also kept in equilibrium through interest adjustments. Now when it comes to marginalist or neo classical economists they also build up their theories based on the classical approach itself. Marginalists also work with the same principles of demand and supply similar to classical approach.

Thus both the schools are buildup on the similar principles but they differ a lot when it comes to establishing equilibrium or shifting from theory of cost to theory of utility. This utility stands as a major difference between the two schools. Classical economists didn’t considered utility as playing factor, they relied on cost of labor and interest. But neoclassical people relied on the utility derived by the market participants resulting in equilibrium conditions. Rationality is an important part of economic analysis under marginalist approach, whereas classical economists behaved as if the decision makers does not make any rational choice. Classical economist consider the cost of a product as its real value but marginalists take the market demand and supply into consideration to determine the value of goods. Thus for classical school profit is a missing point whereas marginalists knows that profit comes from excess of expenses over income earned.

Thu we can see that although classical and marginalist school ate built on same base but they differ a lot in their approaches to utility, value, equilibrium and profits.


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