What is marginalism in business


neoclassical theory. 1. Characterization: Further development of classical teaching. The neoclassical follows the equilibrium approach of the classic. The most significant changes compared to the classical period lie in the transition from objective to subjective value theory and the associated emphasis on marginal calculus. In addition, problems of allocation and distribution versus those of production and growth are now coming to the fore.

Main representatives: Jevons, Menger, Walras.

2. Content: At the center of the neoclassic is the analysis of the distribution of goods among the consumers for a given amount of factors and the problem of allocation, i.e. the question of how the available scarce factors must be used in order to achieve the best possible satisfaction of needs. Extensive use is made of the marginal analysis, which is extended from the production sphere to the demand sphere (marginal utility school). While in the classical period wages are explained by the wage fund theories and the prices of goods via the production costs, in the neoclassical period the importance of the market price is emphasized, which results from the interplay of supply and demand. Supply and demand behavior are derived from marginal productivity and marginal utility considerations. Demand plays a role not only in determining the composition of production, but also in determining relative prices. The question of whether the volume of total demand is sufficient to absorb production is not considered by the neoclassical either. In principle, the validity of Say's theorem is still assumed, but the importance of the price mechanism is particularly underlined, which is assumed to be completely flexible.

3. Central model: Walras' model of general equilibrium.

4. Importance: With the development of the subjective theory of value and marginal calculus, the neoclassical has made a contribution that can hardly be overestimated. Walras succeeded in presenting a closed mathematical total model for the formal mapping of the economic events of an overall economy. This model also served to prove the existence, stability and unambiguity of a macroeconomic equilibrium with full employment. It should not be overlooked, however, that the results of the neoclassical theory are based on very restrictive assumptions. Keynes expressed fundamental criticism of the neoclassical. He referred above all to the role that money plays in the neoclassical era (neutrality of money), to the treatment of the labor market (which in the neoclassical era is always in full employment) and the assumption of complete foresight and the perfect price - and wage flexibility (Keynesianism).

See the corresponding focus article on macroeconomics.