Economic Institution

• Economy


  A social institution that deals with the organization, consumption, and distribution of goods and services
• Goods


  • Commodities categorized as either necessities or luxury items
• Services


  • Activities that benefit people
• Technology and industry


  • Play crucial roles in the growth of economic systems in modern societies
• People are greatly affected by the economy in their efforts to meet their needs and wants
• Economic institutions


  Vital components of society because they are involved in the production, distribution, and purchasing of goods and services that are essential for survival
• Three important questions economic institutions across societies generally answer

  • What goods should be produced?
  • What services should be rendered?
  • How should goods and services be produced and rendered, respectively?
  • For whom should such goods and services be produced and rendered?
• Reciprocity


  A social norm involving in-kind exchanges between people responding to one's action with another equivalent action, typically positive (e.g. returning a favor) though it can be negative (e.g., punishing a negative a favor)
• Transfer


  A payment of money or in-kind benefit (e.g., food stamps) that is given to individuals by the government without receiving any good or service in exchange
• Redistribution


  A concept of modern economies explaining that a nation's wealth is handled over from those who more to those below a certain income level, done through paying taxes
• Market transactions


  Pertain to the exchange of goods and services through a market, important in terms of measuring gross domestic product (GDP)
• Market system


  A type of economic system that allows the free flow of goods between and among private individuals and firms with very limited participation from the government
• Capitalism


  • The other term for a market system, characterized by private property, freedom of enterprise and choice, self-interest, competition, markets and prices, reliance on technology and capital goods, specialization, and use of money with an active but limited government
• Private property


  Encourages investments, innovation, and efficient use of the factors of production, referring not just to real property but also to intellectual property like patents and copyrights
• Freedom of enterprise and choice


  Allows all economic actors- whether an entrepreneur, a worker, or a consumer- to pursue activities that will yield the most benefits for as long as the activities are within legal limits
• Self-interest


  Another principle associated with the market system, integrated with the idea of competition in the marketplace through the invisible hand, bringing about a socially optimum result even in the absence of government intervention
• Market


  A mechanism and not necessarily a place which brings buyers and sellers together for a desired transaction
• Prices


  Serve as signaling devices to indicate the value of a good or service to both the buyers and the sellers and guide their actions on whether they should buy or not or supply more or less
• Extensive use of capital goods and technology


  • The market system rewards technological innovation by bringing more profits to whomever the idea of a new product or production technique came from, with innovators winning over imitators
• Specialization


  Critical to a market economy, where human specialization (division of labor) contributes to efficiency by taking advantage of the differences in each and every person's abilities
• Use of money


  Facilitates an easier exchange between transacting parties, replacing the traditional means of exchange, barter
• Active but limited government


  Needed when there is a market failure and a monopoly emerges, and to carry out interventions to promote the welfare of all segments of the economy
• Market transaction


  Involves parties who sell their goods and services in exchange for cash from consumers
• Market economy


  One where the production, distribution, and consumption of goods and services operate through market transactions
• Free market economy


  One where the price of a good or service is determined by the forces of supply and demand
• Perfectly competitive market


  A market with many competing sellers and consumers who are well-informed of their options, where the market price is estimated to be that price where supply equals demand
• Surplus


  When supply is higher than demand
• Shortage


  When demand is higher than supply
• Oligopoly


  A market with a few sellers or producers
• Monopoly


  A market with only one seller
• Regulation of prices


  The state, through the government, comes in to protect the interest of the consuming public by determining the maximum price which sellers would not be allowed to sell
• Regulation of labor


  The state, through the government, comes in to regulate the prices of labor, in the form of the wages the workers earn, by setting price floors in the form of minimum wages
• Keynesian theory


  Advocated for a reduction in interest rates to encourage investors to borrow money and invest in business to spur production (Monetary Policy), and for governments to increase their public spending on infrastructures to further spur economic activity (Fiscal Policy)
• Command economy or socialist economy


  The government takes over the functions of the market in producing and distributing essential goods and services, rejecting the profit motive and pursuing collective goals like a higher standard of living for all its citizens
• Income redistribution


  The government's role in correcting the imbalance in the access of goods and services, done through the process of using taxes to redistribute income
• Government purchases


  Expenditures on the private sector that utilizes economic resources and which yields domestic outputs
• Transfer payments


  Government spending on the private sector that does not require the absorption or utilization of economic resources, important in leveling income between groups who can actively generate sources of income and those who cannot
• Price support


  The minimum legal price of a good, typically pegged at a higher level than prevailing market price
• International trade


  Enables economies to employ their resources in ways that increase their total output, but can also harm domestic industries and particular groups of resource suppliers who cannot compete with bigger international firms
• Tariffs


  Taxes on imported goods