This document discusses economic institutions and their role in society. It begins by outlining the objectives and overarching questions of the lesson, which are to discuss different economic institutions and their impacts, and examine how we interact and exchange goods and services. It then defines economic institutions as networks that determine how goods and services are produced, distributed, and purchased. The document contrasts market institutions like private businesses with nonmarket institutions like reciprocity and redistribution. It also examines the relationship between states, markets, and institutions like taxes, spending, and international trade organizations.

1. ECONOMIC
INSTITUTIONS

2. OBJECTIVES and
OVERARCHING
QUESTIONS:
OBJECTIVES:
At the end of the lesson, the students should be able to:
1. Discuss the different economic institutions and their
impacts on the lives of people in society
2. Explain the quasi-market role of the different
economic institutions of society.
OVERARCHING QUESTIONS:
1. How do we interact with each other in the domain of
production and the exchange of goods and services?
2. What are the impacts of these on our lives as
members of society?

3. Introduction
One of the challenges in any society is how
to produce, distribute, and consume goods
and services. We, as members of society are
tasked with organizing ourselves as we
convert the raw materials from nature into
finished products, and how we transform
human capital and talent into services that
we provide for our comfort and convenience.
As individuals interacting in a social
community, the process of production,
distribution and consumption is manifested in
economic institutions.

4. ECONOMIC
INSTITUTIONS
Ø it refers to a network of commercial organizations
that determine how goods and services are
produced, generated, distributed, and purchased
Ø a company or an organization that deals with
money or with managing the distribution of money,
goods, and services in an economy.
Ø Banks, government organizations, and investment
funds are all economic institutions: Technical
assistance will be needed to rebuild essential
economic institutions after this upheaval.

5. There are two ways to look at the value and purpose of
economic institutions in society. You can either look at it
from the functionalist perspective or from the conflict
perspective.
Conflict Perspective – argues that economic institutions
emerged in order to benefit the ruling classes or groups.
This perspective asserts that economic institutions are
established by the ruling class in order to benefit their
group at the expense of ordinary laborers.
Functionalist Perspective – views economic institutions as
vital components of society because they are involved in
the production, distribution, and purchasing of goods and
services that are essential for survival.

6. NONMARKETINSTITUTIONS
are those acting on economic factors from
outside the market system. They include
organizing and correcting factors that provide
order to market and other societal institutions
and organizations.

7. Reciprocity – exists when there is an exchange of goods or
labor between individuals in a community. An example of
reciprocity is when neighbors exchange food for labor
rendered, or when farmers rotate among their farms to help in
cultivating the land.
Transfer – entails a redistribution of income that is not
matched by actual exchange of goods and services. An example
of this is donation or financial assistance from a richer relative,
or farm subsidies given to farmers by the government.
Redistribution – considered as combination of the features of
transfer and reciprocity.
Reciprocity, transfer, and redistribution are all considered as
nonmarket transactions since they do not entail the exchange
of cash for the rendering of service or provision of goods.

8. MARKETINSTITUTIONS
Market system – is a type of economic system that allows the free flow
of goods between and among private individuals and firms with very
limited participation from the government. In a market system, private
individuals and firms own most of the factors of production like land and
capital.
Invisible hand – integrates both the idea of self-interest and competition
in the marketplace, which brings about a socially optimum result even in
the absence of government intervention.
Markets and prices are important features of the market system.
Market – is a mechanism and not necessarily a place which brings buyers
and sellers together for a desired transaction.
Prices – serves as signaling device to indicate the value of good or service
to both the buyers and the sellers and guide their actions.

9. MARKETINSTITUTIONS
Specialization – another requirement for a market economy,
critical to a market economy is the ability to produce goods
more efficiently with specialization. Specialization contributes
to efficiency by taking advantage of the differences in each
and every person’s abilities.
Barter – is difficult to carry out because the presence of
‘mutual coincidence of wants’ or transacting parties finding
and having each other’s desires, is hard to come by.
Market transaction – involves parties who sell their goods
and services in exchange for cash from consumers.
Free market economy – is one where the price of a good or
service is determined by the forces of supply and demand.
One of the examples of free markets are sari-sari stores and
the food industry.

10. STATEMARKET RELATIONSHIPS
It is in this aspect that the state plays an important role in the market. The
state, through government, comes in to regulate prices to protect the
interest of the consuming public. Basic commodities such as food are
subject to price ceilings or maximum prices.
Labor is also considered a commodity. Labor is termed as a producer good,
since it is an input to the production of goods and services.
When the government takes over the functions of the market in producing
and distributing essential goods and services, this is called a command
economy or a socialist economy.
The term command economy is interchanged with a socialist economy
because under both system, the means of producing and distributing goods
and services are done collectively or centrally.

11. The government plays an important role in correcting the
imbalance in the access of goods and services through the
process of income redistribution. The primary instrument
used by governments to redistribute income is tax.
Taxes are compulsory contributions to government's
coffers, normally levied on the worker’s income, business
profits, and consumption of goods. Taxes are needed to raise
revenues for the government, but they are also disincentives
for efficiency and hard work.
The government must strive to balance the need for equity
and incentives for efficiency. Once there are enough
revenues, the government can then decide on whether to
use it for government purchase or for transfer payment.
Examples of these are government purchases of fighter
planes or a construction of a mass railway.

12. Transfer payments, on the other
hand, are government spending
on the private sector that does not
require the absorption or
utilization of economic resources.
This is the reason why transfer
payments, unlike government
purchases, are not included in the
Gross Domestic Product (GDP).
Examples of transfer payments are
social security benefits,
unemployment compensation,
subsidies, and veterans benefits.

13. INTERNATIONALTRADE
Economic institutions are not only confined to one specific
territory or geographic location. Sovereign nations, like
individuals and firms, stand to gain from international trade by
specializing in the production of commodities they can produce
with relative efficiency. There is a need for international trade
because the distribution of economic resources is uneven
across different nations.
Products are also differentiated as to quality, design,
workmanship and other nonprice attributes. Some people may
then prefer imported goods to similar goods produced
domestically because of these nonprice attributes.
Just to reiterate, international trade benefits nations because
it enables economies to employ its resources in ways that
increase its total output.

14. GATT also entails the liberalization of government
policies on some services, like tourism, real estate,
advertising, and financial services.
The WTO oversees trade agreements undertaken
by its member nations and also resolves trade
disputes among them. It crafted trade rules to
ensure fair competition among member nations
and their observance to international labor and
environmental standards.

15. The imposition of trade barriers by one nation may also
result in a retaliation of trade barriers of its own by another
nation.
Reciprocity, in international trade, is the granting of mutual
concessions among different countries with respect to
commercial trade restrictions like tariffs and quotas.
Reciprocity agreements may be brokered between
individual countries or groups of countries. It is a traditional
principle under the General Agreements on Tariffs and
Trade (GATT) and the World Trade Organization (WTO).
This trade agreements allows the US president to negotiate
tariff-reduction agreements with other countries even
without the approval of the Congress.
GATT, on the other hand, is a multilateral platform of
negotiation among participating nation, which embraces
the principles of equal, non-discriminatory trade treatment
for all member nations, the reduction of tariffs, and the
elimination of all import quotas.

16. ECONOMIC
INSTITUTIONS