Economics Essay Example | Topics and Well Written Essays - 1000 words - 35

Economics - Essay Example Neoclassical synthesis was a post-war economic concept which combined the Keynesian macroeconomics and microeconomics of the neoclassical school of thought (Mankiw, 2006). Paul Samuelson personified and popularized the neoclassical synthesis by trying to make a solid mathematical foundation of economics. This has led to the current domination of neoclassical synthesis in mainstream economics. The mainstream economics combines the supply and demand models of markets with Keynesian theory (Mankiw, 2006). It provides that costs and opportunities play an important part in shaping the decision making process of economic agents. For example, the consumer theory of demand is a model of mainstream economics which determines how prices (costs) affect quantity demanded of a particular product. In this case, decision makers (e.g. consumers) will choose products with lower costs or prices; hence affecting quantity demanded. One of the theoretical assumptions of neoclassical microeconomics is the allocation of scarce resources among unlimited wants. It is assumed that people develop rational preferences of identifiable outcomes that can be valued. Consumers/households maximize utility while firms maximize profits. Provided that they get access to sufficient information, individuals make independent decisions and act independently. Aggregate demand and aggregate supply are the main theoretical foundations of Keynesian macroeconomics (Mankiw, 2006). The IS-LM model is the basic theory of aggregate demand. When these two classes of theoretical foundations (neoclassical microeconomics and Keynesian macroeconomics) are combined, they result in short-run economic fluctuations which form the basis of mainstream economics. The new neoclassical synthesis borrows the general equilibrium theory from the new classical models. The microeconomic foundations of preferences and constraints also form the basis of the