Institutional Economics

1. Introduction and Background
Institutional Economics

2. Welcome
Welcome to the course of “ Institutional Economics”
at
Department of Economics
Govt.Degree College Dhirkot

3. Prior Knowledge
required
 Defining Economics
 Theorizing economic phenomenon
 Basic Knowledge of Economic Theories
 Neoclassical theory and its assumptions
 Development issues in low and middle
income countries

4. Course Outcome
The course has three basic aims;
1. To familiarize students with basic instruments of
microeconomic choice theory
2. To widen perspective of students pertaining to formal
and informal constraints that determine behavior.
3. To explain relationship between institutions and
economic growth.

5. COURSE LEARNING OUTCOMES
Upon successful completion of the course, the student will be able to:
• ACQUIRE basic instruments of microeconomic choice theory.
• UNDERSTAND the formal and informal constraints that determine
behavior.
• SOLVE the institutional issues through application of modern
microeconomic
theory through informed understanding.
• EVALUATE and explain relationship between institutional
characteristics and
economic growth.

6. Lets Start……………………………………………………

7. Human Being!
Three Major Aspects of Human Life
 Social
 Economic
 Political
In this course our major focus will be on
Economic aspect of individuals and
households and but we will thoroughly
study human institution (humanly devised
Constrains) and how they effect economic
performance in different countries

8. Economics
Definition:
Economics is the study of scarcity and its implications for the use of resources,
production of goods and services, growth of production and welfare over
time, and a great variety of other complex issues of vital concern to society.
Economic theories:
Economic theories try to explain economic phenomena (
‫مظہر‬
) ,to interpret why
and how the economy behaves and what is the best to solution - how to
influence or to solve the economic phenomena. Explain

9. Schools of thoughts in
Economics
Two types of theories
Orthodox: neoclassical (19th century)
Heterodox: Institutional economics, Marxism and Austrian
School ect..
Keynesian Economics
New Institutional Economics ( New Institutional economics
tried to combine Old Institutional economics with
Neoclassical Economic theory

10. Neoclassical Assumption
From the discussion of neoclassical economics (Standard
economics)
Economics is the theory of choice……..
But how do we make choices- Neoclassical Economists say
we use the rationality assumption
Neoclassical economics evolved in the late nineteenth century
& assumes
that people are perfectly informed (know all of the
alternatives) act on the basis of pure logical calculus
(rationality)The Neoclassical economics objective was to
explain efficient resource allocation in developed economies
Thus, Neoclassical economics – happens a world without
Friction

11. Neoclassical Assumption
Neo-classical economics – a world without Friction-
attributed to
 Perfect market
 Homogeneous goods
 No personal or temporal preferences
 Spot market
 Full market transparency
 Response of market participants extremely fast
 Unique price
Number of participants: Polypoly, Oligipoly, Monopoly
Transaction costs not taken into account but seen
imperfectness or market failure

12. Game Theory

13. Institutional Economics
Institutional economics is interested in the interactions
between institutions and the economy: how
institutions influence the functioning, performance,
and development of the economy and, in turn, how
changes in the economy influence the institutions.

14. History of Institutional Economics
Thorstein Veblen (1857–1929) .
John R. Commons (1862–1945)

15. Institutional Economics
Week I
An Introduction to Institutions and Institutional change

16. Institutional Economics
Key Questions?
 How we define Institutions?
 Why there is a need of Institutional Perspective in Economic
History and Theory?
 Why Institutions matter in economic system?
 What types of Institution?
 What is nature of Institution?
 What is difference between Institution and Organization.
 How Institution affect the performance of economy?
 What is major role of Institutions in a society.
 What is institutional change.

17. Institutional Economics
Key Terms
 How we define Institutions?
 Why there is a need of Institutional Perspective in Economic
History and Theory?
 Why Institutions matter in economic system?
 What types of Institution?
 What is nature of Institution?
 What is difference between Institution and Organization.
 How Institution affect the performance of economy?
 What is major role of Institutions in a society.
 What is institutional change.

18. An Introduction to Institutions and
Institutional Change
 Institutions are the rules of the game in a society or,
more formally, are the humanly devised constraints
that shape human interaction.
 In consequence they structure incentives in human
exchange, whether political, social, or economic.
 Institutional change shapes the way societies
evolve through time and hence is the key to
understanding historical change.

19. An Introduction to Institutions and
Institutional Change
 Institutions are the rules of the game in a society or,
more formally, are the humanly devised constraints
that shape human interaction.
 In consequence they structure incentives in human
exchange, whether political, social, or economic.
 Institutional change shapes the way societies evolve
through time and hence is the key to understanding
historical change.

20. An Introduction to Institutions and
Institutional Change
 Institutions affect the performance of economies is hardly
controversial. That the differential performance of
economies over time is fundamentally influenced by the
way institutions evolve is also not controversial.
 Yet neither current economic theory nor cliometric history
shows many signs of appreciating the role of institutions in
economic performance because there as yet has been no
analytical framework to integrate institutional analysis into
economics and economic history.