3. a. What is the neo-classical economics?

b. Compare and contrast Leon Walras and Alfred Marshall.

a. Neo-Classical Economics:

Neo-classical economics is a school of economic thought that emerged in the late 19th and early
20th centuries as a response to the marginalist revolution and the perceived shortcomings of
classical economics. It builds upon the foundation laid by marginalist economists such as
William Stanley Jevons, Carl Menger, and Léon Walras, but incorporates additional concepts
and methodologies. Key features of neo-classical economics include:

Marginal Utility Theory: Like the marginalists, neo-classical economists emphasize the
importance of marginal analysis and marginal utility theory in explaining consumer behavior and
price formation. They argue that individuals make decisions based on the marginal utility of
goods and services relative to their prices.

Subjective Theory of Value: Neo-classical economists adopt the subjective theory of value,
which holds that value is determined by individual preferences and utility rather than objective
factors like labor input. They argue that markets reach equilibrium through the interaction of
supply and demand, where prices adjust to reflect individuals' subjective valuations.

Optimization and Rationality: Neo-classical economics assumes that individuals and firms are
rational actors who seek to maximize their utility or profits given their constraints. This
assumption underpins the analysis of consumer choice, production decisions, and market
outcomes in neo-classical models.

Perfect Competition: Neo-classical economists often use the concept of perfect competition as a
benchmark for analyzing market behavior. In perfect competition, firms are price takers,
products are homogeneous, there are no barriers to entry or exit, and information is perfect. This
idealized market structure serves as a reference point for understanding market efficiency and
welfare.

Equilibrium Analysis: Neo-classical economics employs equilibrium analysis to study the

interaction of supply and demand in markets. Equilibrium is achieved when quantity supplied
equals quantity demanded, leading to stable market prices and allocations. Neo-classical
economists use mathematical models and optimization techniques to analyze equilibrium
conditions and market outcomes.

b. Comparison and Contrast: Leon Walras and Alfred Marshall:

Leon Walras:

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Contribution to Economics: Walras is known for his development of general equilibrium theory,
which analyzes the interdependence of markets and the conditions under which supply equals
demand in all markets simultaneously.

Mathematical Formalism: Walras introduced mathematical methods into economic analysis,

using equations to represent market clearing conditions and the determination of prices and
quantities in equilibrium.

Market Mechanism: He proposed a hypothetical auctioneer who adjusts prices until equilibrium
is reached in all markets, providing a framework for understanding how decentralized decisions
interact to achieve overall market equilibrium.

Alfred Marshall:

Contribution to Economics: Marshall is known for his seminal work "Principles of Economics,"
which synthesized and popularized neo-classical economic theory. He introduced the concepts of
supply and demand, elasticity, and marginal analysis into economic analysis.

Partial Equilibrium Analysis: Marshall focused on partial equilibrium analysis, which studies the
equilibrium conditions in individual markets without considering their interdependence. He
developed the concept of consumer and producer surplus to measure welfare changes in markets.

Market Flexibility: Marshall emphasized the flexibility of markets and the role of competition in
determining prices and allocations. He recognized the importance of imperfect competition and
market power in real-world markets.