15.3 Comparing Neoclassical and Heterodox Theory

For quick reference, a table contrasting general views from neoclassical and heterodox economics on firms, costs, and prices is provided below.  The student should be aware that we are painting in broad strokes here.  Both neoclassical and heterodox economics include a variety of sophisticated models and theories, some of which would contradict the characterizations made below.  However, as an introduction to microeconomics this table should suffice as a reflection of the core positions and standard ideas within these two camps.

Neoclassical Heterodox
Prices are determined in… the market the planning processes of the business enterprise
Prices function to… clear markets ensure the reproduction and growth of business enterprises
As production increases, average total costs… first decline to some minimum (or efficient) point and then start to rise again (that is, ATC is ‘U’-shaped) typically decline up to (or very near) the maximum output at which the production process was designed to operate
Marginal costs… eventually rise with higher levels of production due to the law of diminishing returns are not generally contemplated by business executives and are not relevant to microeconomic theory, in part because firms don’t (and couldn’t) typically produce according marginal costs and revenues.
Price and quantity supplied… are functionally related–that is, when price changes quantity will generally change are, in most instances, determined completely separately
Firms are viewed as… terminal ventures, always and everywhere maximizing profits going concerns, organized and operated to (try to) stay in business into the foreseeable future
Firms make short-run decisions… ignoring fixed costs, because by definition these cannot be changed typically in accordance with the long-run strategies determined through their long-run planning process


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Principles of Microeconomics: Scarcity and Social Provisioning Copyright © 2016 by Erik Dean, Justin Elardo, Mitch Green, Benjamin Wilson, Sebastian Berger is licensed under a Creative Commons Attribution 4.0 International License, except where otherwise noted.

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