Question

Explain the differences and Similarities in the theory of price between the Neo classical and Keynesian model.

Keynesian vs Neo classical theories of price

Answer 1

Firstly let us know about

neo classical model ,neo classical is a broad theory that focuses on supply and demand and the driving forces behind the production, pricing, and consumption of services and goods..l

One of the key assumptions of neo classical is that utility to consumers not the cost of production is the most important factor in determining the value of a product.

Keynesian model, it says about the government should increase demand to boost growth,it believe consumer demand is the primary driving force in an economy.

So it support the expansionary fiscal policy. Drawbacks is that overdoing Keynesian policies increases inflation.

Now difference and similarities

Neoclassical theory of prices

1)Rational behavior and equilibrium takes place in neo classical theory of prices.

2) Rational behavior by selfish individuals

3) marketing clearing (price adjustment)

4) classical dichotomy in this (money is neutral)

5) voluntary or due to rigidities.

6) laissez faire,markets are self regulating and government should not intervene.

Keynesian

1) effective demand and (animal spirits) takes place in Keynesian theory

2) animal spirits that is (non rational behavior) ,and conventional.

3) markets, some markets do not clear

4) in Keynesian theory of price money matters (has real effects)

5) involuntary due to lack of demand on goods markets

6) market economies are unstable and result in unemployment ( government should intervene).

These two models one describes about the short term and long term economic growth.

Now both the neo classical amd Keynesian theories of price are similar in both effect government policies,among other things.one side believes government should play an active role in controlling the economy.

While the other school thinks the economy is better left alone to regulate itself.

By this We can also say that Neoclassical theory is the extended version of the classical theory.