Labor Market Decisions in the Neoclassical Model
With that background in mind, let's focus on how this model looks at the labor market. Remember, do not think of the labor market as a place. Think of the labor market as a process where individuals learn about available jobs and employers learn about potential employees. The focus will clearly be the choices of individuals as they make labor supply decisions or the choices of individual firm owners as they make choices about how many workers to hire. Firms and individuals follow their own self-interest in a rational way. Business owners seek to make the most profits they can and consumers seek to get the most utility. Again, under the assumptions of the model, individuals will interact in the labor market in a predictable way.
Given the construction of supply and demand analysis based on assumptions about how people make decisions in a competitive market, there are claims made as to why competitive markets are viewed with such favor. Checked by competition, self-interest is channeled into productive enterprise. Adam Smith argues that competition alone provided the surest protection against the exploitation of workers and consumers. Competitive markets (meaning all assumptions hold) means scarce resources will be allocated to their most efficient uses will generate a socially optimal outcome.