Neo Classical Synthesis (cont...)

Contrasting with the allocatively, productively and dynamically efficient market model are monopolies, oligopolies, and cartels. When only one or a few firms exist in the market, and there is no credible threat of the entry of competing firms, prices rise above the competitive level, to either a monopolistic or oligopolistic equilibrium price.

Neo-Classical Synthesis (cont.)

This traces to Austrian-American political scientist Joseph Schumpeter's notion that a "perennial gale of creative destruction" is ever sweeping through capitalist economies, driving enterprise at the market's mercy. This led Schumpeter to argue that monopolies did not need to be broken up (as with Standard Oil) because the next gale of economic innovation would do the same.

Neoclassical Synthesis (cont.)

Dynamic efficiency refers to the idea that business which constantly competes must research, create and innovate to keep its share of consumers.

Neo-Classical Synthesis

Have a great weekend!

Neo-Classical Synthesis (cont..)

Productive efficiency simply means that society is making as much as it can. Free markets are meant to reward those who work hard, and therefore those who will put society's resources towards the frontier of its possible production.

Neo-Classical Synthesis (cont.)

Because rational producers will keep producing and selling, and buyers will keep buying up to the last marginal unit of output - or alternatively rational producers will be reduce their output at the margin at which buyers will buy the same amount as produced - there is no waste, the greatest number wants of the greatest number of people become satisfied and utility is perfected because resources can no longer by reallocated to make anyone better off without making someone else worse off; society has achieved allocative efficiency.

Neo-classical synthesis (cont.)

Allocative efficiency is also known as Pareto efficiency after the Italian economist Vilfredo Pareto and means that resources in an economy over the long run will go precisely to those who are willing an able to pay for them.