Chapter 3 a - Economic Institution

Economic Institution
 Introduction to Economic institution

 Types of economic institution
 Characteristics of economic institution
Introduction to Economic Institution

Ever since the first people traded one item for another, there has been
some form of economy in the world. It is how people optimize what they
have to meet their wants and needs.
Economy refers to the social institution through which a society’s

resources (goods and services) are managed. Goods or commodities are
the physical objects we find, grow, or make in order to meet our needs
and the needs of others. Goods can meet essential needs, such as a place
to live, clothing, and food, or they can be luxuries in nature. In contrast to
these objects, services are activities that benefit people. Examples of
services include food preparation and delivery, health care, education,
and entertainment. These services provide some of the resources that
help to maintain and improve a society.
The term ‘economic institutions’ is usually used for socially sanctioned

concepts and structures which men have developed in the process of
satisfying their material needs. They provide basic physical subsistence
for society and meet needs for food, shelter, clothing and other
necessities of life. These institutions include production agriculture and
industry and the distribution, exchange and consumption of commodities,
goods and services necessary for human survival. Secondary economic
institutions are credit and banking system, advertising, co-operatives, etc.
Economic institutions, those institutions that perform economic functions

are covered which can be identified as follows:-
 Establishing and protecting property rights

 Facilitating transactions
 Permitting economic co-operation and organisation
The type of economy depends upon the political form of government. It

depends upon how the state controls the flow of money, goods and
services and status of private property. The roles of free market in the
economic system are the variables that illustrate the relationship between
the state and economy.
Types of Economic System

Economic systems are the means by which countries and governments
distribute resources and trade goods and services. They are used to
control the five factors of production, including labour, capital,
entrepreneurs, physical resources and information resources. Different
economic systems view the use of these factors in different ways.
1. A planned economy or command economic system
A planned economy is one in which the government decides how the

factors of production are used. For example, the government determines
who owns the businesses, who buys and sells to whom, and who makes
the ultimate decisions regarding businesses, including who works for
them. Socialism is a type of command economic system. Historically, the
government has assumed varying degrees of control over the economy in
socialist countries. In some, only major industries have been subjected to
government management; in others, the government has exercised far
more extensive control over the economy.
The classic example of a command economy was the communist Soviet

Union. The collapse of the communist bloc in the late 1980s led to the
demise of many command economies around the world. Cuba continues
to hold on to its planned economy even today.
2. Traditional economic system
A traditional economic system is shaped by tradition. The work that

people do, the goods and services they provide, how they use and
exchange resource all tend to follow long-established patterns. These
economic systems are not very dynamic things don’t change very much.
Standards of living are static; individuals don’t enjoy much financial or
occupational mobility. But economic behaviours and relationships are
predictable.
In many traditional economies, community interests take precedence over

the individual. Individuals may be expected to combine their efforts and
share equally in the proceeds of their labour.
Today you can find traditional economic systems at work among

Australian aborigines and some isolated tribes in the Amazon. In the past,
they could be found everywhere in the feudal agrarian villages of
medieval Europe.
3. Market Economy
Market economy is opposite of planned economy. In market economy,

people decide on their own how to utilize the factors of production. They
can choose from whom they buy, for whom they work, and what business
they own and operate. It is also called as Capitalistic or free market
economy. Economic growth and development in a market economy is
determined by the relative risks and rewards (or profits) that a particular
economic activity presents to individuals. If risks are too high and rewards
are too low, then certain activities probably will not be pursued.
Government involvement in regulating market transactions in a market

economy is limited too much ensuring that the rules of the market are
enforced and applied fairly to all participants. Additionally, government
involvement in planning or directing economic development and growth is
very limited.
4. Mixed Economy
A mixed economic system combines elements of the market and

command economy. Many economic decisions are made in the market by
individuals. But the government also plays a role in the allocation and
distribution of resources. One main characteristic of a mixed economy is
the ownership of goods by both private and government/state-owned
entities. Monopolies have the potential to occur in this type of economy,
but the government closely monitors this. For the economy to be mixed,
the government can control some parts but not all. For example, the
government may control health care and/or welfare in some mixed
economy countries.
The United States today, like most advanced nations, is a mixed economy.
It consists of both private and government/state-owned entities.
Sometimes, the government gets involved to help the economy. Two
examples of government assistance in the U.S. are welfare and
unemployment benefits. These provide financial assistance for people who
are in need. There are many types of welfare programs including housing
aid, aid for children, healthcare, food stamps etc.
Characteristics of Economic Institutions

1. Fulfilment of basic and material needs of man:-
Economic institution helps in achieving basic necessity of individual in

society through food, shelter, clothing, education, etc. It provides the
mediums of survival for individual and society as a whole.
2. Stability of political economy:-
If economic institutions deliver positive results, it would benefit the

society as whole through its better opportunities of employment, health
etc. It helps in providing overall stability to the economy through proper
functioning.
3. Promotes and encourages skills, talents of people:-
Through financial incentives and better job opportunities, economic

institutions encourage skills, talents of people. It increase productivity of
the organisation and overall improves the economy.
4. Provides economic protection:-
Economic institution provides provision of job security, medical facilities,

pensions etc. which in turn gives economic protection to the people.
5. Optimization of resources:-
Due to growing population and urbanization, there is a need to conserve

resources as they are getting depleted. Various environmental issues
happening, people are getting conscious. Through economic institution
various solutions to environmental degradation can be obtained through
sustainable development and optimization of resources.
6. Effects on Balance of payment:-
If the economy is in a favourable condition, it will have a positive balance

of payment (BoP), which will benefit the society through various
developments such as international ventures, employment, foreign
investments etc.
Questions:-
1. What do you mean by economic institution? How do you explain the

functions performed by them?
2. What are types of economic institutions?
3. Explain in detail the various characteristics of economic institution.

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Economic Institution

 Introduction to Economic institution

Introduction to Economic Institution

Economy refers to the social institution through which a society’s

The term ‘economic institutions’ is usually used for socially sanctioned

Economic institutions, those institutions that perform economic functions

 Establishing and protecting property rights

The type of economy depends upon the political form of government. It

Types of Economic System

1. A planned economy or command economic system

A planned economy is one in which the government decides how the

The classic example of a command economy was the communist Soviet

2. Traditional economic system

A traditional economic system is shaped by tradition. The work that

In many traditional economies, community interests take precedence over

Today you can find traditional economic systems at work among

Market economy is opposite of planned economy. In market economy,

Government involvement in regulating market transactions in a market

A mixed economic system combines elements of the market and

Characteristics of Economic Institutions

Economic institution helps in achieving basic necessity of individual in

2. Stability of political economy:-

If economic institutions deliver positive results, it would benefit the

3. Promotes and encourages skills, talents of people:-

Through financial incentives and better job opportunities, economic

Economic institution provides provision of job security, medical facilities,

Due to growing population and urbanization, there is a need to conserve

6. Effects on Balance of payment:-

If the economy is in a favourable condition, it will have a positive balance

1. What do you mean by economic institution? How do you explain the

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