Does neoclassical economics view prices and wages as sticky or flexible? Why?

Sticky prices and wages are those that are slow to adjust to changes in the economy. In contrast, flexible prices and wages can adjust quickly in response to changes in supply and demand, thereby helping to maintain equilibrium in the market.

Neoclassical economics views prices and wages as flexible, rather than sticky. This is because neoclassical theory assumes that markets are highly competitive, with individuals and firms actively participating, and prices and wages being determined by supply and demand forces.

There are several reasons why neoclassical economics views prices and wages as flexible: 1. Rational expectations: Neoclassical theory assumes that individuals and firms are rational and have access to complete information about the market. They adjust their decisions and expectations based on the available information, leading to flexible prices and wages. 2. Perfect competition: Neoclassical markets are characterized by perfect competition, with a large number of buyers and sellers. In such a market, if a firm tries to charge a higher price or offer lower wages than market equilibrium, it will lose customers and employees to other firms, forcing them to adjust prices and wages accordingly. 3. No market frictions: Neoclassical theory assumes that there are no frictions, such as transaction costs, search costs, or information asymmetry, which might prevent prices and wages from adjusting quickly. As a result, prices and wages are flexible in neoclassical analysis. 4. Flexible labor markets: In neoclassical economics, labor markets are considered to be responsive to changes in demand and supply, with wages adjusting to ensure full employment. Therefore, wages are considered to be flexible. To summarize, neoclassical economics views prices and wages as flexible due to rational expectations, perfect competition, absence of market frictions, and flexible labor markets.