What is the Difference Between Classical and Neo Classical Theory?
🆚 Go to Comparative Table 🆚The main difference between classical and neoclassical theory lies in their focus and assumptions. Classical theory, which emerged in the 19th century, focuses on the economic and physical needs of employees, while neoclassical theory, an alteration of classical theory, considers not only physical and economic needs but also job satisfaction and other social needs. Here are some key differences between the two theories:
- Focus: Classical theory is based on the assumption that the most important factor in a product's price is its cost of production. In contrast, neoclassical theory argues that the consumer's perception of a product's value is the driving factor in its price.
- Organization Structure: Classical theory has a hierarchical organization structure with layers of management, while neoclassical theory focuses on employee satisfaction and other social needs.
- Decision-Making: Classical economists assume that people make decisions based on their perception of the value of a product or service, which is influenced by the cost of production. Neoclassical economists argue that people make decisions based on their evaluation of the utility of a product or service.
- Equilibrium: In classical economics, equilibrium occurs when savings equal investment, while in neoclassical economics, equilibrium is achieved through supply and demand.
- Mathematical Models: Classical economics is more empirical and focuses on explaining the production system through social and historical factors. Neoclassical economics, on the other hand, uses mathematical models to study practical components.
In summary, classical theory focuses on the economic and physical needs of employees, while neoclassical theory includes job satisfaction and other social needs. Neoclassical theory also emphasizes the importance of consumer perception in determining product prices, as opposed to classical theory, which focuses on the cost of production.
Comparative Table: Classical vs Neo Classical Theory
The key difference between classical and neoclassical theory lies in the factors they consider in explaining economic phenomena. Classical theory focuses on physical and economic needs, while neoclassical theory considers not only physical and economic needs but also job satisfaction and other social needs. Here is a comparison table highlighting the differences between classical and neoclassical theory:
| Feature | Classical Theory | Neoclassical Theory |
|---|---|---|
| Focus | Physical and economic needs | Physical, economic needs, job satisfaction, and other social needs |
| Organization Structure | Hierarchical with layers of management | Flat with no layers of management, decision-making and execution often involve a team |
| Rewarding System | Incentive-based | Performance-based and consider job satisfaction |
| Key Economists | Adam Smith, David Ricardo, John Stuart Mill | William Stanley Jevons, Carl Menger, Leon Walras |
| Methodology | Empirical and historical | Mathematical and segmented |
| Equilibrium | Occurs when savings equal investment | No specific equilibrium concept |
Classical theory was developed by economists such as Adam Smith, David Ricardo, and John Stuart Mill, while neoclassical theory was developed by William Stanley Jevons, Carl Menger, and Leon Walras. The latter is more relevant to modern-day economics and is often taught alongside Keynesian economics.
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