Like its predecessor, classical economics, neoclassical economics uses the principles of supply and demand to explain the price of goods, the level of output and the distribution of income in markets. But instead of focusing on costs associated with producing goods, neoclassical economics focuses largely on the choices of individuals. Neoclassical economics is grounded in three assumptions:
- That individuals have rational preferences and that preferences can be identified and
assigned a value.
- That individuals maximize utility (i.e., that they aim to satisfy their preferences) and that business firms maximize profits.
- That individuals make independent and informed choices.
Neoclassical economics is distinguished by its focus on marginal utility.