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Neo-classical Vs. Post-keynesian Theory of Prices

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Classical economists assume that production costs are the most significant factor in the item cost. Neoclassical economists believe that the buyer’s perspective on the expense of a product is the driver of its cost. They consider the economic surplus the difference between the real cost of production and the retail price. In spite of the fact in neoclassic theory, the business has little significance, it is central to the post-Keynesian pricing study. In this essay, I will clarify the neoclassical value theory and the post-Keynesian market theory. 

The neoclassical price theory dates back to classical economic forefathers such as Adam Smith and represents the belief in self-interest and individual autonomy. Smith proposed that self-interest motivates relationships between people in economic matters in particular, and individuals who seek their self-interest, mainly by generating wealth, when they are aimed at market mechanisms. The Neoclassical Price Theory assumes also that, given that people have the full social value of each option, there is no externalization of any market exchange, given the full awareness of alternative options. The prices of various goods represent the comparative cost of production for society according to these assumptions. When prices work correctly, buyers ‘will cast an informed vote’ in the purchase of goods, thereby ensuring the best combination of consumer choices for societies. Suppliers must respond to customers’ votes and deliver the most popular products, and thus increase their usefulness. Rationality and its descendant, profit-maximization, is another fundamental principle of the Neoclassical Price Theory. Neoclassical Price Theory assumes that when a choice is made on the market, people will actually be able to decide both about the desired ends and the best way of achieving them. People have clearly specified a choice, then, and will choose the appropriate option or method to optimize the utility or satisfaction of those who are self-interest-motivated ends. Therefore, a key attribute of the economy and the price mechanism is that its activity shows both the needs and the preferences of buyers and the inputs’ shortage. Consumers face budgetary restrictions on the demand side, and Neoclassical Price Theory assumes that when buying goods, consumers accurately calculate their financial restrictions. Rationality implies raising revenue on the supply side. In combining the labor and capital of commodities, and in deciding the number of goods to be made, and at which price, manufacturers primarily rely on maximizing profits. In every situation model, the rationality principle transforms people, whether consumers or suppliers, into abstractions of how any smart person in this situation should act, disregarding psychological predilections, beliefs, values, tastes, and the effect of social institutions. Under perfect competition, the price of the product is not only the gain that consumers obtain from the good or quality, as determined by their willingness to pay, what consumers put on the good. The price also represents the costs of producing the good for providers, the company costs. The net effect is that manufacturers produce goods at the lowest social cost and can buy them from any customer who appreciates the product at this quality and value (Strader 2015).

On the other hand, although the organization has little significance in neoclassical value theory, the study of prices in post-Keynesian studies is important. In this respect, the decisions of companies matter; they affect prices instead of reflecting market prices. The prices of the business are neither classical theory output prices, nor neoclassical scarcity indexes, and, although they are related to the product costs, neither the sales pay. Rates of the company, which are regulated together with their rates, and their ‘total costs are calculated by the client, are politically determined rather than defined costs. Post-Keynesian philosophy firm’s fixed prices are high prices. These are an additional cost for the goods of the direct cost for their manufacturing–an average unit or fixed prime value–as well as a deduction of overheads and income for the direct costs shown in the sales. Nevertheless, since premiums are based on costs and income can not be achieved unless the company’s prizing takes the costs into account, rates can not be determined solely on costs. Costs are not automatically transmitted into prices, which is the case both for product costs, directly and indirectly. Prices rely on the company’s mark-ups and the prices, and the value mark-up will change rather than the quality if the cost of a product changes. The company’s product marketing is prospective and tactical, and while, it does not have an indeterminate interest in the products that maximize profit. The price-impacting drivers, even if pricing levels cannot be predicted, can be identified as ways of preserving and increasing the company’s profits for strategies that determine the company and as defined as the market clearance or production requirements for firm growth and survival. Corporations vary in the manner they perform their activities, but not the degree to which they meet the requirements. To survive, they must all meet. In the Post Keynesian demand theory, firms’ conditions are key, which takes into account the value of their pricing power and explains its effects on market determination and actions. Prices reflect the company’s interests rather than their industry or market conditions. The rational calculation of costs and the conception of the business that underlies it gives Post Keynesian theory its rationality and meaning is calculated rather than value or demand (Shapiro 2003).

In conclusion, both neoclassical and post-Keynesian have strengths and weaknesses. The combination of the Keynesian and the Neoclassical model should simultaneously be attributed to two horses. The neoclassical approach stresses total production. The potential GDP level is based on long-term productivity growth and, after a change in aggregate demand, the economy typically returns to full employment. Neoclassical economists have more chances of supporting a hand-off or rather limited position for effective stabilization policy as regards productivity and timeliness of Keynesian politics. Although the keys tend to favor an acceptable trade-off between inflation and unemployment against the depression, neoclassical economists argue that there is no such trade-off; any short-term developments in lower unemployment eventually go away and inflation must result from aggressive policies.

Cite

  • Shapiro, Nina & Sawyer, Malcolm. (2003). Post Keynesian Price Theory. Journal of Post Keynesian Economics. 25. 355-365. 10.1080/00213624.2000.11506330.
  • Strader, J. M. (2015). The impact of neoclassical price theory on monopolization law: a transatlantic perspective (Doctoral dissertation, UCL (University College London)).

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