Challenging Assumptions and Fallacies in Neoclassical Economics
This lecture challenges the assumptions of neoclassical economics and highlights the fallacies in profit maximization.
00:00:00 This lecture discusses the invalidity of both the market demand and supply curves in neoclassical economics, challenging the realism of the theory.
📈 The neoclassical theory assumes that the market demand curve slopes downwards, but the market supply curve doesn't work as intended.
🤔 Critics argue that the realism of the neoclassical theory is questionable, but Milton Friedman defends it by stating that firms behave as if they equate marginal cost and marginal revenue to maximize profits.
💻 Using a computer model, the behavior of firms is tested. They randomly choose output levels and adjust accordingly based on profit maximization, rather than consciously calculating marginal cost and marginal revenue.
00:06:25 A simulation explores the output levels and profits of firms in a monopoly and a competitive industry. The results challenge neoclassical predictions.
💡 The speaker analyzes the relationship between the number of firms in an industry, output levels, and market prices, challenging neoclassical theory predictions.
🔄 Using a computer program, the speaker tests the convergence of output levels in a simulated industry with varying numbers of firms.
💰 Contrary to neoclassical theory, the speaker finds that profit-maximizing firms don't equate marginal cost and marginal revenue and actually make higher profits.
00:12:51 This lecture challenges the assumptions of neoclassical economics, demonstrating that individual firms' demand curves cannot be horizontal. It highlights the mathematical fallacies in equating marginal costs to marginal revenue and questions the profit-maximizing behavior of firms.
1️⃣ While studying the behavior of firms, it was discovered that individual firms cannot have a horizontal demand curve, contrary to what is taught in microeconomics.
2️⃣ The assumption that firms are price takers and simply take what's offered on the market is a logical error. The demand curve facing an individual firm has the same slope as the market demand curve.
3️⃣ In 1957, a neoclassical economist named George Stigler published a paper proving that the competition historically contemplated in economics does not exist, further challenging traditional neoclassical theory.
00:19:18 This lecture discusses the fundamental mistake in neoclassical theory and how it relies on irrational behavior. It also explores a modified equation to justify the fallacy and the true rule for profit maximization.
📉 The neoclassical theory assumes rational profit maximizers, but it makes a fundamental mistake in calculus by equating an infinitesimal amount with zero.
🔍 By visually zooming in on the horizontal axis while leaving the vertical axis full range, the downward sloping line can be flattened into a flat line.
💡 The rational belief in the neoclassical theory depends on irrational behavior, but it can be justified by adding enough irrational profit minimizers in the model.
00:25:45 The lecture discusses the concept of maximizing profits by equating marginal cost and marginal revenue. It critiques neoclassical theory and argues that rational profit-maximizing behavior is incompatible with welfare maximization.
📈 Maximizing profits involves equating marginal cost and marginal revenue curves.
💰 Calculating total revenue minus total cost is essential for determining profit.
🤝 The distinction between competitive firms and monopolies is based on a mathematical fallacy.
00:32:08 This video discusses the concept of market behavior and challenges the idea of a perfectly efficient market. It explains the limitations of the neoclassical theory and the importance of considering rational behavior in economic models.
🔑 Efficiency in engines and markets is not achievable due to waste.
📚 The theory of perfect competition is flawed, as it assumes false behavior assumptions.
💰 Under certain circumstances, monopoly can be more beneficial than competition.
00:38:35 This lecture explores market behavior and profit maximization. It discusses the impact of a firm's behavior on other firms' profits and compares the profit levels of monopolies and competitive firms.
📚 The profit-maximizing expression for a single firm is derived by expanding the total revenue minus total cost equation.
💰 The conventional formula for profit maximization is valid only for monopolies, while competitive firms produce the same output despite the number of firms in the industry.
📈 The correct formula for profit maximization suggests that competitive firms should make the gap between marginal cost and marginal revenue equal to (N-1)/N, where N is the number of firms in the industry.
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