Neo Classical Economics

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The origins and most important economists of both schools of economic thought The Neo-Keynesian school of economic thought The Classical economic theory assumed that if the demand for a commodity or service was raised, then prices would rise accordingly and firms would increase output to meet public demand. According to the Classical economic theory markets were self-regulating. Classicals did not differentiate between microeconomics and macroeconomics. However, during the Great depression there was not an equilibrium in the macro economy. In 1936 John Maynard Keynes’ book “The General Theory of Employment, Interest and Money” a distinction macroeconomics from microeconomics. The theory focuses on the total spending of an economy and how…show more content…
Franco Modigliani was another notable economists in this theory. These economists attempted to interpret and formalize Keynes writings and to synthesize it with neo-classical models of economics. Their work is known as the Neoclassical- Keynesian Synthesis or Neo-Keynesian. Their models form the core ideas of the Neo-Keynesian economics. In 1937 John Hicks introduced the IS/LM model (investment saving-liquidity preference money supply) in his book “Mr Keynes and the Classics”. This was the beginning of Neo-Keynesianism. This model was a synthesis between Keynesian and neo-classical models. The IS/LM diagrams has two curves that intersect. The (Investment/Savings) curves relates demand for savings to the interest rates and the (Liquidity/ Money Supply) relates demand for money to the interest rates. When these two curves intersect this intersection represents and equilibrium level of demand. This model was later expanded upon by Franco Modigliani in 1944. The Neo-Keynesian combined elements of the Keynesian macro-economic with more classical micro-economic theory. This theory did focus on the concept of full employment but focused on economic growth and stability. Neo-Keynesians proposed that Keynes were right in the short term and classical economists were correct in the long-term. According to this theory short term shocks may put markets out of equilibrium. However, in the long- term, free…show more content…
The Neo-classical school of thought was developed from the classical economics that was dominant in the eighteenth and the nineteenth century. This theory was developed at the end of the nineteenth and the beginning of the twentieth century in Europe. The change from classical to Neo-classical theory is sometimes called the Marginal revolution in economics. The marginal revolution dates back to the 1860s/ 1870s. This theory was established upon the principles of the classical model that economic activity is regulated by competition and that this results in efficient use of resources. As a result, this creates market equilibrium between supply and demand. However, this theory departs from the classical point-of-view since it takes into account mathematical and analytical
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