Final answer:
The two building blocks of neoclassical economics are that potential GDP determines the economy's size and that wages and prices adjust flexibly over time. Neoclassical economics emphasizes long-term growth and the flexibility of wages and prices to reach an economy's potential output.
Step-by-step explanation:
Neoclassical Economics Building Blocks
The foundational concepts of neoclassical economics focus on the long-run tendencies of an economy. One such building block is the idea that potential GDP determines the overall size of the economy. Another key concept is that wages and prices will adjust in a flexible manner, ensuring that the economy gravitates back towards its potential GDP level of output over time. This adjustment process is characterized by the assumption that even if wages and prices can be sticky in the short run, they are flexible over time, allowing the economy to adjust back to its long-run equilibrium.
From a policy perspective, neoclassical economists argue that the government should focus on long-term growth and controlling inflation, rather than short-term fluctuations caused by the business cycle. Neoclassical analysis is therefore more concerned with long-run macroeconomic issues, as opposed to Keynesian economics, which is more applicable to short-run macroeconomic analysis, particularly economic downturns where wages and prices can be sticky.