Institutions and New Industries and Markets

Question 1

Institutions

Answer 1

Institutions are written and unwritten rules that govern what people do when they interact.

Question 2

What 2 things do normal/good institutions provide

Answer 2

Provide both constraints and incentives

Question 3

Types of institutions

Answer 3

Formal institutions: these are codified laws (clear written rules)
Informal institutions: Unwritten rules, customs and traditions that influence economic behaviour

Question 4

Characteristics of Institutions

Answer 4

1. Stability: Provide continuity of economic interactions over time
2. Normative frameworks: define appropriate behaviour for economic agents
3. Cultural context: reflect prevailing values and practices of the societies they serve

Question 5

Economic functions of Institutions

Answer 5

1. Property rights: secure property rights provide incentives for individuals to participate in economic activities -> increase investment, innovation and trade
2. Transaction costs: less transaction costs (time to find right person to trade with, costs of making sure other party fair) which lower business costs thus incentivises business startups
3. Government stability: if there are risks of civil war, decentivises businesses to set up.

Question 6

Path dependence

Answer 6

the historical development of institutions influences their current and future states

Question 7

Institutional quality

Answer 7

effectiveness of institutions in performing intended functions

Question 8

Institutional change

Answer 8

how institutions are created, evolve, adapt or transform over time

Question 9

Changes in institutions

Answer 9

Political reforms
Shifts in social norms/values

Question 10

Creative Destruction

Answer 10

Schumpeter’s name for the process by which firms using old technology that are unable to adapt are swept away by the new as they can no longer compete

Question 11

Network effects

Answer 11

where the value of a product or service increases as more people use it

Question 12

Disruptive innovation

Answer 12

innovations creating new markets eventually disrupting existing ones

Question 13

Endogenous growth theory

Answer 13

emphasises that economic growth is primarily driven by internal factors of an economy - particularly innovation and human capital.
Helped by ^R&D and ^education

Question 14

Marginal Product

Answer 14

the additional amount of output produced if the factor input is increased by 1

Question 15

Diminishing Marginal Product

Answer 15

as the factor input increases by one, there is a smaller output produced than the previous factor input increase by one.

Question 16

Beveridge Curve

Answer 16

the inverse relationship between the job vacancy rate and unemployment

Question 17

Diffusion Gap

Answer 17

the lag between the introduction of an innovation and its general use

Question 18

Long - tail economics

Answer 18

Selling a large number of unique products in relatively small quantities. Strategies are based online to find target audience - allows business to not be required to sell to a mass market.

Question 19

2 - Sided Markets (and pricing strategy

Answer 19

E.g Uber: passengers and drivers. 2 different groups that share a platform and are dependent on each other.
Pricing strategies: often, customers get subsidised by recieving lower prices wheras other side pays more to stay on the platform