6 Difference Between Classical And Neoclassical Economics

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What Is Classical Economics?

Classical economics school of thought flourished primarily in Britain in the late 18th and early-to-mid 19th century.  Its main thinkers are held to be Adam smith, Jean-Baptiste Say, David Ricardo, Thomas Roberto Malthus and John Stuart Mill. The value and distribution theory of classical economics states that the value of a product or service depends on its cost of production. The cost of production is determined by factors of production, which include labor, capital, land and entrepreneurship.

Classical economics rejected the idea of government intervening in the market place. The theory was that any problem would eventually be sorted out by the forces in the markets. Classical economists were largely in favor of free trade.  

What You Need To Know About Classical Economics

  • In classical economics, the value of a product or a service depends on its cost of production. The cost of production is determined by factors of production, which include labor, capital, land and entrepreneurship.
  • Classical economics school of thought flourished primarily in Britain in the late 18th and early-to-mid 19th century.
  • The classical school aims at explaining how economic systems grow and contract. All analyses and predictions are based on a wide perspective on the economy as a whole.
  • The study of classical economics is more empirical. It focuses on explaining the capitalist mode of production through social and historical analyses. 
  • In classical economics, equilibrium occurs when savings are equal to investment.
  • In classical economics, profit is a payment is a payment to a capitalist for performing a socially useful function.

What Is Neoclassical Economics?

Neoclassical economics is an approach to economics focusing on the determination of goods, outputs and income distributions in the markets through supply and demand. It integrates the cost of production theory from classical economics with the concept of utility maximization and marginalism. Neoclassical economics includes the work of Stanley Jevons, Maria Edgeworth, Leon Walras, Vilfredo Pareto and other economists.

Neoclassical economics emerged in the 1900s. In 1933, imperfect competition models were introduced into neoclassical economics. Some new concepts such as indifference curves and marginal revenues curves were used. The new tools were instrumental in improving on the complexity of its mathematical approaches, boosting the development of neoclassical economics.

Neoclassical economics dominated microeconomics and together with Keynesian economics, formed the neoclassical synthesis which dominated mainstream economics as Neo-Keynesian economics from the 1950s to the 1970s.

What You Need To Know About Neoclassical Economics

  • Neoclassical economics is a broad theory that focuses on supply and demand as the driving forces behind the production, pricing and consumption of goods and services.
  • Neoclassical economics dominated microeconomics and together with Keynesian economics, formed the neoclassical synthesis which dominated mainstream economics as Neo-Keynesian economics from the 1950s to the 1970s.
  • The neoclassical school explains the behaviors of individuals or firms with a whole system. The neoclassical method takes a focused view of one small part of an entire system.
  • The study of neoclassical economics depends on mathematical models. It implements a mathematical approach instead of a historical concept.
  • In neoclassical economics, equilibrium is a function of demand and supply across all markets. Equilibrium occurs at the intersection point of supply and demand curves.
  • According to neoclassical economists, profit is simply a surplus of earnings over expenses.
  • Neoclassical economics is sometimes criticized for having a normative bias. In this view, it does not focus on explaining actual economies but instead on describing a theoretical world.

Difference Between Classical And Neoclassical Economics In Tabular Form

BASIS OF COMPARISON   CLASSICAL ECONOMICS NEOCLASSICAL ECONOMICS
Description In classical economics, the value of a product or a service depends on its cost of production. The cost of production is determined by factors of production, which include labor, capital, land and entrepreneurship.   Neoclassical economics is a broad theory that focuses on supply and demand as the driving forces behind the production, pricing and consumption of goods and services.  
Period of Domination Classical economics school of thought flourished primarily in Britain in the late 18th and early-to-mid 19th century.    Neoclassical economics dominated microeconomics and together with Keynesian economics, formed the neoclassical synthesis which dominated mainstream economics as Neo-Keynesian economics from the 1950s to the 1970s.  
Main Thinkers Its main thinkers are held to be Adam smith, Jean-Baptiste Say, David Ricardo, Thomas Roberto Malthus and John Stuart Mill. Neoclassical economics includes the work of Stanley Jevons, Maria Edgeworth, Leon Walras, Vilfredo Pareto and other economists.
Objective The classical school aims at explaining how economic systems grow and contract. All analyses and predictions are based on a wide perspective on the economy as a whole.   The neoclassical school explains the behaviors of individuals or firms with a whole system. The neoclassical method takes a focused view of one small part of an entire system.  
Focus The study of classical economics is more empirical. It focuses on explaining the capitalist mode of production through social and historical analyses.    The study of neoclassical economics depends on mathematical models. It implements a mathematical approach instead of a historical concept.  
Equilibrium In classical economics, equilibrium occurs when savings are equal to investment.   In neoclassical economics, equilibrium is a function of demand and supply across all markets. Equilibrium occurs at the intersection point of supply and demand curves.  
Profit In classical economics, profit is a payment is a payment to a capitalist for performing a socially useful function.   According to neoclassical economists, profit is simply a surplus of earnings over expenses.