Neoclassical – Macroeconomics, Essay Example

In 19^th Century, economists of the second half of neoclassical era emerged arise and they opposed this classical model of economic school of thought. Neoclassical macroeconomic seeks to describe the utility maximization with the basic theory of rational choice. For the firms, the Neoclassical theory describes that firms are somewhat a black box, in which inputs are constantly processed into the uniform outputs. This model supports the aggregate demand of investment by considering the firm as an agent which maximizes the goals impact to constraints the resource. The below diagram shows the analysis between that aggregate demand which supports the neo classical theory of macro economics.

Short-run

The above diagram shows that in short run when the aggregate demand increases it will increase the output of the firms (Q1 to Q2), but it will also lead the prices to increase. It will happen when firm is tolerating from diminishing returns which will force the prices of products to increase and that will cover the costs of higher level of products.

Long-run

The situation s different in long run. The economy will move towards the firms full employment. So when demand increases will lead towards inflationary. Diagram shown below;

The graph of long-run shows that curve is in vertical direction when the employment level is full i.e. output (Qfe), and this leads when aggregate demand increases so that will increase the prices but with no output increased.

In the system of non linear dynamics the economy is complicated with the intrinsic changing in technological in growth of economy. Complexity involves in the interactions of non equilibrium and nonlinear changes, and these are the main components for life and labor division. While in neoclassical economics the models for equilibrium and linear are the initial part in complex systems.

While in the acceleration principle, defining the neo classical economics characteristics will be unchallenged. The econometrics analysis force linear structuture on critical relationships, occassionaly it gets successful but the fundamental relationships are in non linear nature if its without testing.

The conditions which lead to the linear acceleration principle of the neoclassical economic model is there must be an improved productivity which is considered to be ‘exogenous’ variable. This variable needs to be present as it leads to the linear principle. This condition is believed to be independent of capital investment amounts.

Another condition is the existing of the group known as Neo-Keynesians which included the framework of macroeconomic theory of Keynes. This leads to linear acceleration as it helps in understanding the aggregate short run issues of the firms. So, to achieve a linear acceleration, the model of neoclassical economics must become relevant for growth of microeconomic analysis in long term. These conditions leads to non marginal changes in surroundings of uncertainty to the linear system.

In neoclassical theory of productivity economists assume that in raising the growth rate will increase the labor supply and that will also increase the productivity level of  capital and labor. One of the major issue of capitalist is that the economies of free enterprise has been instable in employment and output. The human resources waste is particularly linked with unemployment, not just to the people who must tolerate unemployment but also the community of all members suffer in output loss. So, the neoclassical theory of production doesn’t support aggregate demand in free enterprise productions systems.