Neoclassical economics is taught in a majority of econ classrooms around the world. The theory attempts to solve the valuation problems that plagued classical economics by introducing concepts of "rational choice" and "utility" into its theories.

Fundamental Assumptions

There are three fundamental assumptions in neoclassical economics: 1) People are rational. 2) Individuals and firms maximize utility or profit. 3) Individuals behave independently and with full information.


Originally entitled by Thorstein Veblen in 1900 in his work "Preconceptions of Economic Science," neoclassical economics grew out of a revolutionary movement to incorporate utility and rational thought into the core teachings of economics. Dubbed by many as the "marginal revolution," works that propelled this movement include "Theory of Political Economy," by William Stanley Jevons; "Principles of Economics," by Carl Menger; and "Elements of Pure Economics," by Leon Walras.


As neoclassical economics is the dominant economic theory, it accordingly includes most of the subtopics of study under economics such as rational expectations, industrial organization, macroeconomics, etc.


One of the main benefits from neoclassical economics is that it helps to explain how prices set and quantities produced are arrived at in the economy. By introducing individuals as utility-maximizing agents within the economy, the theory is able to explain why prices go up in a shortage or how monopolies restrict supply to maximize profit.


Many have questioned the degree to which neoclassical economics actually reflects reality. Some view that the school of thought is rather normative, meaning that the theory describes an ideal individual in an ideal economy. Some have called neoclassical economics elitist because its highly mathematical nature is a barrier to outside scrutiny or criticism.