Neo-classical school of thought operates on the basis of few assumptions. Firstly, it is assumed that rational and well informed economic decisions are made by the firms after fully evaluating the utility of the decisions. Consumers are expected to purchase the goods after comparison which is having highest utility or personal value for them (Gilpin, 2011). The basic aim of consumers is to purchase goods that can provide them maximum personal satisfaction. On the other hand, companies work for achieving maximum profits and when both the concerned parties achieves their goals the market experiences the state of economic equilibrium.
Profits according to neo-classical school of thought is based on various factors such as risk, ability of the managers for attaining higher profits and changes in the economic conditions. The risks can be of two types ones which can be insured by the businesses and another type of risks are those which cannot be insured as no insurance is available for them (Cwik, 2011). Rate of profitability differs due to the conditions of uncertainty prevailing in the market which cannot be insured. The conditions of uncertainty arise due to the dynamic changes in market trends. If the assumption of perfect competition is dropped profits in the market may arise out of number of reasons mainly due to powers of monopoly and monopsony.
Neo-classical economists’ supports normal profits which arise when the firm earns surplus amount of revenue after paying off the costs of financial capital. This situation of profit earning is not the real profit earning situation as firms which are earning just returns on their cost of capital does not count themselves as well doing firms as there are less or no chances for improvement or expansion are seen (Louzek, 2011). Monopoly profits are also favored by the neo-classical economists for the situations in which the firms are dealing with legal and practical barriers of entry into the industry.