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Micro Econ

by: Tori Busa

Micro Econ ECON 1102

Tori Busa

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chapter 3: economic institutions
Microeconomic Principles
John DiLeonardo
Class Notes
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This 3 page Class Notes was uploaded by Tori Busa on Monday October 10, 2016. The Class Notes belongs to ECON 1102 at Temple University taught by John DiLeonardo in Fall 2016. Since its upload, it has received 4 views. For similar materials see Microeconomic Principles in Economics at Temple University.


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Date Created: 10/10/16
Microeconomics Chapter 3- Economic Institutions U.S. Economy  US= market economy, which is a system based on private property and markets in which individuals decide how, what, and for whom to produce  Works throw rewards and payments  Individuals are fee to do whatever they want as along as legal  Fluctuations in prices pay central role in coordinating individuals wants Capitalism  Based on ownership of the means of production resides with a small group of individuals Socialism  Based on goodwill towards others, not self-interest, society decides what, how, for whom to produce  People contribute what they can and get what they need  Government ownership controls production with economic activity Evolving the Economic System 1. Feudalism= Based on tradition and dominated the Western world from 8-15 century 2. Mercantilism= Government controls economic activity by doling out rights undertake economic activities. Dominant in 18 century 3. During the industrial rev, technology and machines rapidly modernized 4. Capitalism Good market: Business: Factor market: Households 1. Business o Private producing units o Decide what to produce, how to produce, for whom to produce o Produce what they believe will sell and make profit o Channeling desire to make profit allows invisible hand to work o Guided by consumer sovereignty o Sole proprietorships= direct control by owner/limited funds/ unlimited liability o Corporations= share work and risk/ limited funds/ unlimited liability o Partnerships= no liability/ possible double taxation of income o E-commerce and digital economy=brings people together at low cost in a virtual marketplace where geographic doesn’t matter Microeconomics o B2B=firm enhancing goods and services through online sales and auctions o B2C= firms selling goods and services to consumers online shopping o C2B= individual offering goods and services to firms online o C2C= individuals buying and selling goods to one another online 2. Households o Households are groups of individuals living together making joint decisions o Supply labor with which business produce and government governs o Largest source of household income is salaries and wages o Households vote with their dollars to determine what business produce o Make significant # of decisions in economy 3. Government o US has a federal gov. system with levels. (federal, state, local) all with own power (actor) o Federal biggest spending is income security and health and education o Two roles referee and actor 1. Actor who collects money in taxes and spends that money on projects, defense, education 2. Referee who sets riles that determine relations between businesses and households o Gov. consume 15% of country’s output (actor) o Sets laws which regulate interactions between household and businesses (referee) EX: Business have to comply with equal opportunity and labor laws Roles of a government in a market 1. Providing a stable set of institutions and rules 2. Promoting effective and workable competition 3. Correcting externalities 4. Ensuring economic stability and growth 5. Providing public goods 6. Adjusting for undesirable market results o How choices are presented affect the choices people make and nudges take this into account o Default option bias= people tend to choose whatever is presented as the default option Microeconomics Market and government failures  Market failures= situations in which market does not lead to a desired result  Government failures= situations in which the gov. intervenes and makes things worse  Policy makers= decide which failure is the least problematic, gov. or market Global Institutions and Corporations  US economic institutions are integrated with worlds economy  Global corporations= corps with substantial operations in production and sales in more than one country  Global corporations create jobs, bring new tech, and provide competition for domestic companies  There is no global gov. to regulate global corps but gov. has developed international institutions to promote negotiations and coordinate economic relations among countries EX: United Nations= designed to achieve international cooperation, has no ability to tax or enforce policies EX: World Bank= international financial institution that works to secure loans for developing countries SUMMARY  US economy is a market economy (capitalistic) that gives property rights to individuals and relies on market forces to solve the what, how and for whom to produce  Socialism is based on gov. ownership, means of production with economic activity governed by central planning  Economic systems are in constant rate of evolution  Circular flow diagram of US market economy 1. Business= decide what, how much, and form whom decisions in production. (proprietorships, partnerships, corporations) 2. Households= supply labor and influence business decisions through consumer sovereignty 3. Government= serves as an actor and referee in economy and six roles for government  Because there is no world government, governments enter voluntary organizations that regulate international markets


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