Economic Systems

- Is a set of economic institutions that dominate a given economy with the main objective
of solving the basic economic problems.

1. Traditional Economy
- economic decisions are made with great influence from the past
- communal land ownership
- the leader decides on the management of agricultural production which is the basis
of economy
- The production, distribution, and use of economic resources are based on traditional
practices
- New technologies are not welcome since they are in contrast with the traditional
practices of their ancestors
- The economy is only its third priority while culture and religion are its foremost
priorities
- Examples: Mongolia and Afghanistan

2. Command Economy – factors of production and distribution are owned and managed
by the state.
- Resource allocation is done by the government
- Presence of central planning of all economic activities
- There is no free competition (the government is the only seller)
- Only the government plays the role in setting legal framework for economic life
production and distribution of goods and services
- The products or needs of the people are distributed based on priorities set by the
committee
- Example: North Korea, Cuba

3. Market Economy
- private sector owns and manages the means of production
- the price system in a market structure applies to determine how much will be paid
for a certain commodity or service
- it is known as laissez-faire or free enterprise
- there is minimum government interference on decisions pertaining to the
management of economy
- Existence of competition often results to monopoly
- there is the presence of economic power
- criticisms of the market economy
a. failure in preventing competition
b. failure in the prevention of boom-and-bust cycles
c. failure in the distribution of income evenly
d. failure in producing public goods
e. failure in preventing pollution
- Example: Singapore, Hong Kong, China
4. Mixed Economy
- the means of production are owned and controlled by the private sector as well as
the government
- people decide on the economic activities within the economy
- the combinations of the best features of capitalist and command economies are
observable in the market

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 - the problem of distribution of goods and services and allocation of economic
resources are determined through a combination of the market system and
governmental laws and policies
- Example: Sweden, Philippines, Japan

Demand
- Refers to the number or amount of goods and services desired by the consumers at
various prices in a particular period of time.

Law of Demand

As the price increases, quantity demanded decreases; and as price decreases, quantity
demanded increases, if other factors remain constant (ceteris paribus).

Determinants of Demand

1. Consumer’s Income a. Substitute products

a. Normal Good b. Complementary products
b. Inferior Good 4. Consumer’s taste and Preferences
2. Consumer’s Expectation of future prices 5. Population
3. Prices of related goods

Demand Schedule – shows the tabular representation of the relationship between the quantity
of good demanded and the price of that good.

Demand Curve – shows graphically the relationship between the quantity of a good demanded
and its corresponding price with other variables held constant.

Demand Schedule for SUV

Points Price (in Million) Quantity Demanded for SUV

A 0 4,000
B 1 3,500
C 2 3,000
D 3 2,500
E 4 2,000
F 5 1,500
G 6 1,000

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 70
60
50
40
Price

30
20
10
0
4000 3500 3000 2500 2000 1500 1000 500
Quantity Demanded (Qd)

Change in Quantity Demanded (∆Qd) It is due only to a change in the price of

goods and services. It is represented by a movement along the demand curve which
indicates a movement from one point to another point of the same demand curve

Change in Demand(∆D). It is brought by the changes in the non-price determinants of

demand. It is graphically represented by shifting from one demand curve to another.

Price P

Initial Demand New Demand

New Demand Initial Demand

Quantity Q

Increase in Demand Decrease in Demand

SUPPLY

- The maximum units/quantity of goods and services that producers are willing and able to
supply at a given price at a given period of time.

Law of Supply

As price increase, quantity supplied also increases; and as price decreases, quantity
supplied also decreases.

Determinants of Supply

1. Change in Technology
2. Cost of inputs used

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 3. Expectation of Future Price
4. Price of Related Products
5. Government Regulations and Taxes
6. Government Subsidies
7. Number of Firms in the market

Supply Schedule – shows the tabular representation of the relationship between the quantity of
a good supplied and its price.

Supply Curve – shows graphically the relationship between the quantity of a good supplied and
its corresponding price with other variables held constant.

Supply Schedule for Sports Utility Vehicle

Points Price (in Million) Quantity Supplied for SUV

A 0 -2,000
B 1 -1,000
C 2 0
D 3 1,000
E 4 2,000
F 5 2,500
G 6 3,000

Change in Quantity Supplied (∆QS) vs Change in Supply (∆S)

Change in Quantity Supplied (∆QS). Movement along the supply curve is known as
change in quantity supplied, which shows the movement from one point to another point on the
same supply curve.

- This is due only to a change in the price of goods and services.

Change in Supply(∆S). Shifting from one supply curve to another is called Change in
Supply. This is brought about by a change in the non-price factors.

P P

Initial supply new supply

New Supply initial supply

Increase in supply

Q Q

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Demand and Supply create a Market

 Market – means by which individuals interact to buy and sell

- Represents all the arrangements used to buy and sell a particular good of
service.
- Markets reduce Transaction Cost (the cost of time and information required
for exchange)

MARKET EQUILIBRIUM

- A state which implies a balance between the opposing forces (consumers

and producers), a situation in which quantity demanded and quantity supplied
are equal
- It is determined by the intersection of the demand curve and the supply curve
- The quantity that consumers will buy is equal to the amount or quantity the
producers are able and willing to offer.

<<<< SURPLUS – a situation where quantity supplied is greater than quantity demanded

>>>>SHORTAGE – a situation where quantity demanded is greater than the quantity supplied

EQUILIBRIUM USING DEMAND AND SUPPLY SCHEDULE

Points Price (in Million) Qd Qs State of Market Pressure on

Price
A 0 4,000 -2,000
B 1 3,500 -1,000
C 2 3,000 0
D 3 2,500 1,000
E 4 2,000 2,000
F 5 1,500 3,000
G 6 1,000 4,000
h 7 500 5,000

EQUILIBRIUM USING DEMAND AND SUPPLY CURVE

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Price Control

 Price Floors (minimum selling price) – a minimum legal price below which a good or
service cannot be sold, a price floor must be set above the equilibrium price
 Price Ceiling (maximum selling price) – a maximum legal price above which a good or
service cannot be sold; to be effective, a price ceiling must be set below the equilibrium
price

Shortages and Surplus as a Result of Price Controls

 Shortages – likely to occur if government tries to restrict firms in charging higher prices
through price ceiling. When the maximum price that can be imposed remains below the
equilibrium price in the market, there will be lingering shortage; sellers will be reluctant
to supply as much as buyers would want to purchase
 Surplus – occur if the government will impose price floor. When the price is above
equilibrium, producers will be willing to supply more goods and services than what the
buyers are willing to purchase.

Seatwork

A. Plot the following hypothetical market demand and supply

schedule for commodity X
Quantity Demanded Price (Peso) Quantity supplied
(units)
150 30 900
300 25 800
350 20 700
600 15 600
800 10 400
1000 5 200