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In: Economics

Some economists have argued that the reform of transition countries posed challenges to neoclassical economic theory....

Some economists have argued that the reform of transition countries posed challenges to neoclassical economic theory. Agree, Disagree and Why?

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Expert Solution

-: Neoclassical economic theory:-

Neoclassicaleconomicsisasbroadtherory that focuses on supply and demand as the driving force behind the production, pricing, and consumption of goods and services. It emergedin around 1900 to compete with ;the earlier theories of classical economics. one of lthe key early assumption of neoclassical leconomics 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 centuray based on book by William stanley jevons, Carl manger, and leon Walras.

Neoclassical economists believe that a consumer's first concern is to maximize personal satisfaction. Therefore, they make purchasing decsisions based on their evaluations of the utility of a product or service. This theory coincides with rationalo lbehavior theory, with states that people act rationally when making economic decisions.

Neoclassical economic stipualates that a product or service often has value above and beyond its producdtion costs. While classical economic theory assumes that as 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

People make decisions to allocate resources such as time, labor, and money in order to maximoze theri personal satisfaction. The daily trasactions people actually engage in to get what they need or desire are an important part of the economy.

The trm "neo calssical" was already coined by Thorstein Veblen in 1900. It descsrsibes the synthesis of the subjective and objective theory of value in a diagram of supply and demand, which awas developed by ALfred Marshall. Marshall combined the classical understanding that the value of a commodity results from the costs of production with the new findings of marginalism, stating that the value is determind by individual utility. Until today, the market diagram represesnting the inersection of supply and demand is a central element of neoclassical economics

The paradigmatics core of neoclassical theory forms today's economic ' mainstresam' and dominates economics education and research. According to the neoclassical perspective, the central economic problem is the organization and allocation of scarce resources. This imkplies that efficiency uderstood as the optimal usage of the available resources in order to omaximize individual utility and consequently the welfare of a country becomes the most relevant evalution criterion. The central reserch domains of neoclassical economivs are microeconomics, which analyses the behaviour of households andd firms macroeconomics, which examines economic aggregates and the interaction of markets, and economerics, which serves as an analytical tool.

Different definitions of neoclassical economics:- Colander , Rosser and Holt argued that fundamental to neoclassical economics was the " Holy Trinity" of

  • Rationality
  • Selfishness
  • Equilibrium

Arnsperger and Varoufakis argue that three axioms constitute the paradigmatic core of neoclassical economics:

  • Methodological individualism
  • Methodological instrumentalism
  • Methodological equilbration

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