INSTITUTIONS, POWER & INEQUALITY
Full Exam-Ready Explanation Notes
1. Introduction — What This Unit Is About
Core Question
The central question of this unit is:
Who gets what in the economy — and why?
Economic outcomes (who receives income, resources, and opportunities) depend on several factors:
• Institutions
• Power
• Preferences
• Technology
• Endowments
However, the main focus of this unit is that:
Institutions and power determine income distribution.
This means the rules of society and the relative power of individuals strongly influence how
resources are allocated.
2. Institutions
Definition (Exam-Ready)
Institutions are the formal and informal rules that govern interactions between individuals and
determine incentives, constraints, and payoffs.
Key phrase often used in exams:
Institutions = the rules of the game.
Institutions Determine
Institutions influence many aspects of economic life:
• Who owns property
• Who has legal rights
• Who can enforce contracts
• Who can vote
• Who can work
• Who has bargaining power
Effects of Institutions
Institutions shape:
• Structural power
• Bargaining power
• Income distribution
• Economic efficiency
• Fairness
Therefore, institutions strongly affect who benefits from economic activity.
, 3. Power
Definition
Power is defined as:
The ability to get what you want even when others disagree.
In economics, power influences how economic outcomes are negotiated and distributed.
There are two main types of power.
3.1 Structural Power
Definition
Structural power refers to the value of a person’s next best alternative if an agreement fails.
This alternative option is called the reservation option.
Structural Power = value of the reservation option
Reservation Option
The reservation option is the fallback position if no agreement is reached.
If the reservation option improves, structural power increases.
Example:
If a worker can easily find another job, their structural power is higher.
If they have no alternatives, their structural power is lower.
3.2 Bargaining Power
Bargaining power refers to the ability to influence the terms of exchange or negotiation.
This can include the ability to:
• set terms of exchange
• make take-it-or-leave-it offers
• threaten penalties
• influence political institutions
Examples:
• Employers setting wages
• Workers organising strikes
• Citizens voting in elections
Full Exam-Ready Explanation Notes
1. Introduction — What This Unit Is About
Core Question
The central question of this unit is:
Who gets what in the economy — and why?
Economic outcomes (who receives income, resources, and opportunities) depend on several factors:
• Institutions
• Power
• Preferences
• Technology
• Endowments
However, the main focus of this unit is that:
Institutions and power determine income distribution.
This means the rules of society and the relative power of individuals strongly influence how
resources are allocated.
2. Institutions
Definition (Exam-Ready)
Institutions are the formal and informal rules that govern interactions between individuals and
determine incentives, constraints, and payoffs.
Key phrase often used in exams:
Institutions = the rules of the game.
Institutions Determine
Institutions influence many aspects of economic life:
• Who owns property
• Who has legal rights
• Who can enforce contracts
• Who can vote
• Who can work
• Who has bargaining power
Effects of Institutions
Institutions shape:
• Structural power
• Bargaining power
• Income distribution
• Economic efficiency
• Fairness
Therefore, institutions strongly affect who benefits from economic activity.
, 3. Power
Definition
Power is defined as:
The ability to get what you want even when others disagree.
In economics, power influences how economic outcomes are negotiated and distributed.
There are two main types of power.
3.1 Structural Power
Definition
Structural power refers to the value of a person’s next best alternative if an agreement fails.
This alternative option is called the reservation option.
Structural Power = value of the reservation option
Reservation Option
The reservation option is the fallback position if no agreement is reached.
If the reservation option improves, structural power increases.
Example:
If a worker can easily find another job, their structural power is higher.
If they have no alternatives, their structural power is lower.
3.2 Bargaining Power
Bargaining power refers to the ability to influence the terms of exchange or negotiation.
This can include the ability to:
• set terms of exchange
• make take-it-or-leave-it offers
• threaten penalties
• influence political institutions
Examples:
• Employers setting wages
• Workers organising strikes
• Citizens voting in elections
