Economic institutions

Understanding Culture, Society and Politics

1. ECONOMIC INSTITUTIONS

2. ECONOMIC INSTITUTIONS Refers to a network of commercial organizations that determine how goods and services are produced, generated , distributed, and purchased.

3. Two ways value and purpose of Economic Institutions Functionalist Perspective Conflict Perspective

4. FUNCTIONALIST PERSPECTIVE views economic institutions as vital components of society because they are involved in production, distribution and purchasing of goods and services that are essential for survival . it refers to systems , agencies , and organizations , both in public and private sector .

5. FUNCTIONALIST PERSPECTIVE involved in the production of food, clothing, and other material items that people need and want . in general, it is the economic system that provides the institutional arrangement and coordinating mechanism of the different activities that take place in the economy.

6. CONFLICT PERSPECTIVE argues that economic institutions emerged in order to benefit the ruling classes or groups . a major proponent of this perspective is Karl Marx .

7. CONFLICT PERSPECTIVE identifies the capitalists as one who perpetuate income inequality deprive the proletariats or the working class access to a decent quality of life

8. ECONOMIC INSTITUTIONS Nonmarket institution Market institutions State-Market relationship International trade

9. A. NONMARKET INSTITUTIONS Do not entail the exchange of cash for the rendering of service and provision of goods. Reciprocity , Transfer , Redistribution

10. 1. RECIPROCITY Exists when there is an exchange of goods or labor between individuals in a community. Includes direct barter or simultaneous exchange of goods or gift exchange where the return of goods given or labor rendered is delayed. Gift exchange is different from true gift-giving where no return is expected .

11. RECIPROCITY Neighbors exchange food for labor rendered Farmers rotate among their farms to help in cultivating the land

12. 2. TRANSFER Redistribution of income that is not matched by actual exchange of goods and services. Transfer Payments – transfer of productive assets due to inheritance

13. TRANSFER Donation or financial assistance from a richer relative Farm subsidies given to farmers by the government

14. 3. REDISTRIBUTION Combination of the features of transfer and reciprocity, where the economic exchange involves the collection of goods from members.

15. B. MARKET INSTITUTIONS 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.

16. MARKET INSTITUTIONS Key Features: Private property Freedom of Enterprise and Choice Self-interest and Competition Markets and Prices

17. MARKET INSTITUTIONS Key Features: Reliance on Technology and Capital goods Specialization Use of Money An active but limited government

18. 1. Private Property/Ownershi p Own most of the factors of production like land and capital. Encourages investments, innovation, and efficient use of the factors of production

19. Private Property/Ownershi p Does not just refer to real property but also to intellectual property like patents and copyrights Encourages the efficient use of the factors of production so as to raise the level of productivity derived from the use of said resources

20. 2. Freedom of Enterprise and Choice Allows all economic actors whether an entrepreneur, a worker or a consumer to pursue activities that will yield the most benefits for as long as the activities are within legal limits.

21. Freedom of Enterprise and Choice For Entrepreneur – this means the freedom to access and utilize the different economic resources to produce their choice of goods and services and sell them to their target markets.

22. Freedom of Enterprise and Choice For Workers – this means the freedom to pursue economic opportunities for which they are qualified.

23. Freedom of Enterprise and Choice For Consumers – this means the freedom to buy goods and services that gives the highest level of satisfaction.

24. 3. Self-interest and Competition Invisible hand – integrates both the idea of self-interest and competition in the market place, which brings about a socially optimum result even in the absence of government intervention.

25. Self-interest and Competition For the Producers – this means the production a variety of goods and services desired by the consumers and using methods of production that are cost effective.

26. Self-interest and Competition For the Consumers – this means buying goods and services that provides the highest level of satisfaction at the lowest price available .

27. 4. Markets and Prices Market – is a mechanism and not necessarily a place brings buyers and sellers together for desired transaction . Prices – serve as signaling device to indicate the value of a good or service to both the buyers and the sellers

28. 5. Reliance on Technology and Capital goods The market system rewards technological innovation by bringing more profits to whomever the idea of a new product or production technique came from.

29. 6. Specialization Human specialization – is called the division of labor . contributes to efficiency by taking advantage of the differences in each and every person’s abilities .

30. Specialization saves time by allowing individuals to concentrate all their mental and physical faculties on a single task and voiding loss of time which takes place with the shifting from one job to another.

31. 7. The Use of Money facilitates an easier exchange between transacting parties . Prior to its invention, barter , or the swapping of goods for goods, is the traditional means of exchange .

32. The Use of Money Barter – is difficult to carry out because the presence of ‘mutual coincidence of wants‘ or transacting parties finding and having each other’s desires. Money – becomes a very convenient means of standardizing values .

33. 8. An Active but Limited Government A market system promotes efficiency but it is not a perfect system. Government is needed to carry out interventions to promote the welfare of all segments of the economy.

34. B. MARKET INSTITUTIONS Market Transaction – involves parties who sell their goods and services in exchange for cash from consumers. Market Economy – is one where the production, distribution, and consumption of goods and services operate through market transaction.

35. B. MARKET INSTITUTIONS Type of Market Free market economy Perfectly competitive economy

36. Free Market Economy is one where the price of a good or service is determined by the forces of supply and demand .

37. Free market economy Supply – the available level of products or services provided by producers or sellers. Demand – the level of willingness of consumers to purchase.

38. Perfectly Competitive Economy where there are many completing sellers, and that consumers are well-informed of their options of where to buy.

39. Perfectly Competitive Economy Market price – is estimated to be that price where supply equals demand . Rational price – the price where the willingness of sellers to sell coincides with the willingness of the consumers to buy .

40. Perfectly Competitive Economy Surplus – happens when supply is higher than demand . Shortage – happens when demand is higher than supply .

41. Perfectly Competitive Economy Oligopoly – only a few seller or producer. Ex: Mobile phone service industry and airline industry Monopoly – only one seller. Ex: Power industry ( Meralco )

42. C . STATE-MARKET RELATIONSHIP The state plays an important role in the market through the government. STATE = GOVERNMENT

43. C . STATE-MARKET RELATIONSHIP Regulate the price to protect the consuming public. Basic commodities (food) are subject to price ceiling or maximum prices .

44. C . STATE-MARKET RELATIONSHIP The prices of electricity and mobile services are subjected to government regulation (Energy Regulatory Board)

45. C . STATE-MARKET RELATIONSHIP Labor markets, the government set price floors in the form of minimum wages .

46. Keynesian Theorist in Economics Government interventions in economic institution is warranted to protect the interest of consumers and workers.

47. Keynesian Theorist in Economics It is also advocated to correct the tendency of the private sector to make decisions that are detrimental to economy.

48. Keynesian Theorist in Economics Monetary policy – reduction in interest rates so to encourage investors to borrow money and invest in business to spur production.

49. Keynesian Theorist in Economics Fiscal policy – encourage to increase their public spending on infrastructures to further spur economic activity.

50. Government Acts as an agent of the state tasked to supervise and make decisions on the production and allocation of essential economic resources.

51. State Social thinker (Max Weber) Is a political body that exercises monopoly of violence or legitimate control over the use of force within its territory.

52. When government takes over the functions of the market in producing and distributing essentials goods and services, this is called a command economy or a socialist economy .

53. Command Economy an economy in which production, investment, prices, and incomes are determined centrally by the government.

54. Profit Motive Means of exploiting labor which is also rejected in socialist system. Ex: Wages are kept low to increase the profits of the capitalist

55. Socialist Economy the primary motivation in economic activities is the pursuit of collective goals like a higher standard of living for all the citizens.

56. Income Larger incomes – accrue to those whose labor is marked with innovation, creativity, and industry. Income redistributions – a process that corrects the imbalance in the access of goods and services.

57. Income Tax – the primary instrument used by the government to redistribute income.

58. Transfer Payments A payment made or income received in which no goods or services are being paid for, such as a benefit or subsidy.

59. Transfer Payments Social security benefits – transfer of income between the old and the young. Unemployment benefits – transfer of income between the employed and the unemployed.

60. Transfer Payments Agricultural price support – transfer of income between farmers and the consumers.

61. D . INTERNATIONAL TRADE Economic institutions are not only confined to one specific territory or geographic location. Enables economies to employ its resources in ways that increase its total output.

62. D . INTERNATIONAL TRADE Sovereign nations – stand to gain from international trade by specializing in the production of commodities

63. D . INTERNATIONAL TRADE Tariffs – are taxes on imported goods . Quotas – are the limits set on quantity of imported goods that can enter a domestic company.

64. D . INTERNATIONAL TRADE General Agreement on Tariffs and Trade (GATT) – is a multilateral platform of negotiation among participating nations

65. D . INTERNATIONAL TRADE World Trade Organization (WTO) Reciprocal Trade Agreements Act of 1934 – serve as the foundation for the greater economic integration.