Classical economics is a school of thought that emphasizes the role of the market in the allocation of resources and the distribution of income. It is based on the ideas of Adam Smith, who argued that free markets lead to economic prosperity. Classical economics has been influential in shaping government policy and economic theory.
In a free market, prices are determined by the interaction of supply and demand. Producers supply goods and services at prices that they believe will be profitable, while consumers demand goods and services at prices that they are willing to pay. The market price is the price that clears the market, meaning that the quantity demanded by consumers equals the quantity supplied by producers.
Classical economics argues that the market is efficient and that prices accurately reflect all relevant information. This means that there is no need for government intervention in the economy, as the market will always allocate resources efficiently. Classical economics also argues that laissez-faire policies – policies that allow businesses to operate without government interference – will lead to economic prosperity.
Despite its influence, classical economics has been criticized for failing to take into account important factors, such as the role of money, credit, and banking. Additionally, classical economics does not explain how economies can experience periods of recession or depression.