Neoclassical Economics

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DEFINITION of 'Neoclassical Economics'

An approach to economics that relates supply and demand to an individual's rationality and his or her ability to maximize utility or profit. Neoclassical economics also increased the use of mathematical equations in the study of various aspects of the economy. This approach was developed in the late-nineteenth century, based on books by William Stanley Jevons, Carl Menger and Leon Walras.

INVESTOPEDIA EXPLAINS 'Neoclassical Economics'

Since its inception, neoclassical economics has grown to become the primary take on modern-day economics. Although it is now the most widely taught form of economics, this school of thought still has its detractors. Most criticism points out that neoclassical economics makes many unfounded and unrealistic assumptions that do not represent real situations. For example, the assumption that all parties will behave rationally overlooks the fact that human nature is vulnerable to other forces, which cause people to make irrational choices. Therefore, many critics believe that this approach cannot be used to describe actual economies.

Neoclassical economics is also sometimes blamed for inequalities in global debt and trade relations because the theory holds that such matters as labor rights will improve naturally, as a result of economic conditions.

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