The scope of this essay is to critically discuss the assumptions made about the consumer and the firm that are used by neoclassical microeconomics to define their theory. In order to successful achieve this goal an overview of microeconomics will be required. Following this will be discussions with regards to what assumptions have been made in neoclassical microeconomics. After this I will move onto a more detailed critique of the assumptions and the theory itself. I will conclude with how the assumptions have affected and what impacts (in any) they have had on Neo-classical microeconomic theory.
Neo-classical economics tends to be incorporated or at least mentioned and critiqued in most schools of economic thought. Not everybody agrees on what exactly is neoclassical economics. This has caused theorists to develop a large number of approaches based on neoclassical economics and the application there of to a wide variety of situations and economic related functional areas.
There are a number of assumptions that neoclassical economists use to develop theories so that they may better understand the allocation of scarce resources towards various areas of need. (The is because improving the way in which resources are allocated can increases the wealth of a nation)
There are 3 main assumptions that are used in order to construct neoclassical microeconomics.
1) People have rational preferences among outcomes that can be identified and associated with a value
2) Individuals maximize utility and firms maximize profits
3) People act independently on the basis of full and relevant information.
Neo-classical economists tend to assume that human beings make the choices that give them the best possible advantage given the circumstances they face. This basically means that they do the best they can with what they have i.e. making the most out of the situation. Circumstances and environmental factors that...