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The Neo Classical Theory of supply and demand is a shorter version of the Adam Smith’s version of the working of the economic market. In essence they are the same but the Neo Classical Theory fails to explain some key factors of the economy. When dealing with scarcity and the need for choice, Neo Classical economists use the demand and supply as the fundamental idea that provides explanation of the free market. However, unlike Adam Smith’s version, this theory does not provide a clear answer to what happens to the market when supply and demand is not in equilibrium. ... The problem with the Neo Classical Theory is that is doesn’t provide a solution to shortages and surplus. ... Even though Adam Smith’s theory seems much more developed, it does have its own flaws. Smith fails to recognize that resources are limited and companies cannot compete endlessly to lower prices. Therefore it is very important to take a look at the Adam Smith’s version of the working market and try to compare his theory and the Neo Classical Theory.
Lets begin by introducing Adam Smith’s invisible hand theory. Smith believed that an economic system worked best if people had the right to choose what they bought and sold. ... Having said that, it is important to point out that this theory has a build in mechanism of a classical competition. ... Neo Classical economists would say that the companied would simply produce less when quantity demanded for the product decreased and more if the quantity demanded increased. However, according to Adam Smith’s invisible hand there is more to this. ... The Neo Classical Theory does not explain how competition drives prices down and why there is always an incentive for companies to invest money.
Approximate Word count = 1423
Approximate Pages = 5.7
(250 words per page double spaced)
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