Question

1.        The law of contract is a branch of civil law giving special recognition to economic relationships. Within the context of the neoclassical competitive economic model, describe a perfect contract. Outline the range of contracts that exist in the economy. Discuss reasons why these contracts differ from the neoclassical model. What conclusions can be made about the efficiency of these alternative contracts?

Answer 1

Answer: Neoclassical economics is an approach to economics focusing on the determination of goods, outputs, and income distributions in markets through supply and demand. This determination is often mediated through a hypothesized maximization of utility by income-constrained individuals and of profits by firms facing production costs and employing available information and factors of production, in accordance with rational choice theory.

In economics ,a perfect contract under neoclassical competitive economic model studies how economic actors can and do construct contractual arrangements, generally in the presence of asymmetric information. Because of its connections with both agency and incentives, contract theory is often categorized within a field known as Law and economics. One prominent application of it is the design of optimal schemes of managerial compensation. In the field of economics, the first formal treatment of this topic was given by Kenneth Arrow in the 1960s. In 2016, Oliver Hart and Bengt R. Holmström both received the Nobel Memorial Prize in Economic Sciences for their work on contract theory, covering many topics from CEO pay to privatizations.

There are multiple range of contracts that exist in the economy, which are quit related or different from the  neoclassical model. A Neo-classical contract is a form of contract, defined by McNeil, describing a contract dependent upon trilateral governance, in which "third party assistance" is used for resolving disputes or evaluating performance. Such contracts form a distinct group, along with classical and relational contracts, in McNeil's system of classification.

The change in economic theory from classical to neoclassical economics has been called the "marginal revolution", although it has been argued that the process was slower than the term suggests.^[14] It is frequently dated from William Stanley Jevons's Theory of Political Economy (1871), Carl Menger's Principles of Economics(1871), and Léon Walras's Elements of Pure Economics (1874–1877). Historians of economics and economists have debated:

• Whether utility or marginalism was more essential to this revolution (whether the noun or the adjective in the phrase "marginal utility" is more important)
• Whether there was a revolutionary change of thought or merely a gradual development and change of emphasis from their predecessors
• Whether grouping these economists together disguises differences more important than their similarities.^[15]

In particular, Jevons saw his economics as an application and development of Jeremy Bentham's utilitarianism and never had a fully developed general equilibrium theory. Menger did not embrace this hedonic conception, explained diminishing marginal utility in terms of subjective prioritization of possible uses, and emphasized disequilibrium and the discrete; further Menger had an objection to the use of mathematics in economics, while the other two modeled their theories after 19th century mechanics.^[16] Jevons built on the hedonic conception of Bentham or of Mill, while Walras was more interested in the interaction of markets than in explaining the individual psyche.^[15]

Conclusions that can be made about the efficiency of these alternative contracts include

Contract law has neither a complete descriptive theory, explaining what the law is, nor a complete normative theory, explaining what the law should be. These gaps are unsurprising given the traditional definition of contract as embracing all promises that the law will enforce. Even a theory of contract law that focuses only on the enforcement of bargains must still consider the entire continuum from standard form contracts between firms and consumers to commercial contracts between business firms.

The analysis of competition in the neoclassical theory is contained in the model of perfect competition, which describes the ideal conditions that must hold in the market so as to ensure the existence of perfectly competitive behaviour from the typical firm.