Neo-classical Vs. Post-keynesian Theory Of Prices

Classical economists assumed that item costs were dominated by production costs. Neoclassical economics consider that the price is determined by how the buyer views the product. The economic surplus is defined as the difference between retail price and real production costs. Even though the business is of little importance in neoclassic pricing theory, it is an important part of post-Keynesian pricing studies. This essay will outline the neoclassical values theory and post Keynesian market theory.

Neoclassical price theory was developed by Adam Smith, a classical economic thinker. It is a belief that individuals are responsible for their own decisions and can act independently. Smith believed self-interest is what motivates people to cooperate in economic affairs. However, self-interest can also drive individuals to seek their own interests, primarily through the generation of wealth. Neoclassical Price Theory posits that market exchanges are not externalized if people understand all of the options. These assumptions lead to the price of goods representing the social cost of production. If prices are correctly set, buyers ‘will vote in informed ways’ when purchasing goods. This helps ensure that consumers have the best choice for their needs. To increase the usefulness of their products, suppliers must respond to customer votes. Neoclassical Price Theory’s fundamental principles also include rationality and profit-maximization. Neoclassical Price Theory holds that people can make a decision on the market about what they want and how to achieve 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. It is important that the economy and its price mechanism show the buyers’ preferences and the supply of inputs. Neoclassical Price Theory holds that consumers have to consider their budgets when purchasing goods. Rationality requires revenue growth on the supply-side. When combining labor and capital, or deciding how many goods should be produced, manufacturers are primarily focused on maximising their profits. The rationality principle is applied to all situations. It transforms consumers and suppliers into abstracts that describe how smart people should behave. This disregards psychological predilections, beliefs values and tastes as well as the effects of social institutions. Price is not the only thing consumers get from the product. The cost of making the product for the provider, or the company, is also included in the price. This means that manufacturers can produce goods at a low social cost, and are able to sell them to any customer who values the product (Strader 2015). The decisions made by companies have an impact on prices, not market prices. The business prices are not classical theory output or neoclassical price scarcity indexes. These prices are not related to the product cost but they do not relate to sales. Rates for the company are also regulated. The client calculates the ‘total costs’. These rates are not set costs but are rather political. The fixed prices of Post-Keynesian philosophy companies are very high. These are the extra cost of the goods of the manufacturing costs-an average unit or fixed prim value-aswell as deductions of overheads. However, premiums and income are dependent on costs. If the prizing of the company does not take into account costs, rates cannot be solely determined on the basis of costs. Both product and indirect costs are affected by the cost of production. Costs do not automatically translate into price. Prices are influenced by the company’s markups and prices. The value mark-up is affected by changes in product cost. Product marketing by the company is strategic and prospective. However, the company does not have an indeterminate desire to maximize profit.

Even though it is impossible to predict pricing levels, the price-impacting drivers can be identified. They are strategies to increase profits and preserve the company’s profits. However, corporations differ in the way they operate their business activities. This does not mean that they are all equal. All must meet these requirements in order to survive. Post Keynesian demand theory identifies that firms’ circumstances are critical. This theory uses the value of firms’ pricing power to explain market action and determine their prices. Prices reflect the company’s needs and not their market or industry. Post Keynesian theory’s rationality in cost calculation and business conception gives it its meaning.

Both neoclassical models and post-Keynesian are strong and weak. Two horses can simultaneously account for the Keynesian-Neoclassical combination. The neoclassical perspective emphasizes total productivity. The potential GDP level is determined by long-term productivity growth. Typically, full employment returns after a change of aggregate demand. Neoclassical economics are more inclined to support a hand-off or a limited position for effective stabilization. This includes productivity and the timeliness Keynesian policies. The keys favor a fair trade-off between unemployment and inflation, but neoclassical economics argue that such a trade-off is not possible. Any short-term changes in unemployment will eventually disappear and the only way to increase inflation is through aggressive policies.


Shapiro and Sawyer, Malcolm. (2003). Price theory from a Post Keynesian perspective. The Journal of Post Keynesian Economics is a publication that focuses on economic theories after the work of John Maynard Keynes. 25. 355-365. 10.1080/00213624.2000.11506330.

Strader, J. M. (2015). The impact on monopolization law of neoclassical Price Theory: A Transatlantic Perspective (Doctoral dissertation), University College London.


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    Rose Webb is an educational blogger and volunteer who also studies for a degree in law. She loves to write about her experiences and share her knowledge with others, and is passionate about helping others to achieve their goals.

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