TYPES OF ECONOMIC SYSTEM
FUNDAMENTALS OF ECONOMIC
ECONOMIC SYSTEM
WHY ECONOMICS PROBLEM EXIST?
1. Economic problems exist because of
fundamental facts:
- resources are limited; and
- human wants are unlimited.
2. Human wants cannot all be possibly satisfied
because resources are scarce.
THE 4 FUNDAMENTAL ECONOMIC
PROBLEMS
1. What goods and services are to be produced?
2.How many goods or services are to be produced?
3.How are the goods or services produced?
4.For whom are the goods or services produced?
ECONOMIC SYSTEM
WHAT IS ECONOMIC SYSTEM?
-Economic System is comprised of the various
processes of organizing and motivating labor,
producing, distributing, and circulating of the fruits of
human labor, including products and services,
consumer goods, machines, tools, and other
technology used as inputs to future production, and
the infrastructure within and through which
production, distribution, and circulation occurs in a
particular society.
- Economic system is the framework in which society
decides on its economic problems.
-The principal objective of an economic system is to
solve the fundamental economic problems.
-economic systems have one common goal: a high
standard of living for all the citizens.
AND
two
1.TRADITIONAL ECONOMY
-Decisions on what, how, and for whom to produce
are made by referring to the traditional manner of
doing things.
-Traditional Economy is an economic system that
answers the four fundamental economic problems
based on social customs and on how the society has
dealt with these questions in the past.
-the method of production is primitive or ancient or
old
EXAMPLES:
T’NALAK WEAVING
FARMING
HUNTING AND FISHING
2. COMMAND ECONOMY
-the government owns and operate the factors of
production
-Command Economy is an economic system where the
means of production are owned and controlled by the
government and the answers to the four fundamental
economic problems are dictated by the government
through the head of the nation or a group of men
designated by the head to make decisions
-is an economic system where the means of
production are owned and controlled by the
government
-Decisions are arrived at by planners or government
men who dictate what, how, and for whom to
produce.
-The government plans what to produce and how
resources should be allocated
-The consumer’s freedom of choice is curtailed, and
the system does not enable him to participate in the
decision-making process regarding the answers to the
society’s fundamental economic problems.
 -While the economy of United States is basically
market-oriented, there exist forms of government
regulation and control
3. MARKET ECONOMY -On the other hand, the People’s Republic of China’s
economy is basically command-oriented in nature, yet
-is an economic system wherein the means of it cannot be said that it does not use the price system
production are privately-owned and answers the at all
fundamental economic problems by considering
consumer’s choice - The Philippine economy is a mixture of the three
forms of economic systems.
-The four fundamental economic problems are
answered in the marketplace by the interaction of -The existence of price control, strict government
buyers and sellers regulations and government support and subsidy
programs are proofs of the importance of government
-Competition is supreme, there is consumer participation in decision-making in the country’s
sovereignty, and the price of the goods is the guiding production activities
factor for producers to know what and how much to
produce.
-The market prices serve as signals to the producers
about what goods to produce and how much of these
goods should be produced
-High prices indicate that goods are in demand and
serve as go signals for production
- However, prices tend to fall when goods are not in
good demand and serve as a red light to decrease or
limit production.
- Price mechanism- is the situation where decision on
price and quantity in a market are made based on
demand and supply alone
- MARKET ECONOMY is a system where private
individuals and businesses drive the economy on the
basis of demand and supply without state or gov.
intervention.

4. MIXED ECONOMY
- Mixed Economy is a blend of the different types of
economic system.
 BASIC MICROECONOMICS

LESSON 3

THE CIRCULAR FLOW MODEL

Economic activities take place through the

interrelationship that exists between two economic
units :

The household,
which is the
basic consuming
unit;

The business
firm, which is
the basic
producing unit.

The Circular Flow Model

• The Circular Flow Model is a model that
is used to show the flow of resources and
income through an economy.
• It is a simple economic model showing
the relationship between money income
and spending for the economy.
• The circular flow model is only a model,
a simplification of a complex reality.
However, it is necessary to be understood
in order to have a clear understanding of
the complexities that are encountered in
the economic activities of a nation
 BASIC MICROECONOMICS

LESSON 4

THE CONCEPT OF DEMAND AND SUPPLY

DEMAND
The theory of supply and demand shows how
consumer preferences determine consumer
demand for goods and services and how business
costs determine supply in the product market.
Market is defined as an institution or mechanism
that brings together buyers (demanders) and
sellers (suppliers) of particular goods, services
and resources.
A place where buyers and sellers can meet to
facilitate the exchange or transaction of goods
and services.
Pure Competition a is a market standardized,
homogeneous or similar products consisting
DEMAND SCHEDULE
many independently interacting buyers and
sellers who determine price. A demand schedule of a housewife for mangoes
in Vigan City can be arrived at by simply asking
her how many kilos she buys at a different prices.
The demand for a product is the amount of the If the price of mango is at P35 per kilo, she
good or service that a buyers in a specific market purchases 1 kilo per week, at P30 buys 2 kilos per
are willing and able to buy per unit of time, week, at P25 she buys 3 kilos, at P20 she buys 4
kilos, and at P15 she buys 5 kilos.
Demand is the desire of households for goods
and services in the particular product market and
this desire must be supported by their capacity
and willingness to pay for such goods and
services.
Present demand may indicate actual purchases of
goods and services, while on the other hand,
future desire for products may be surveyed to
arrive at projected demand.

DEMAND CAN BE MEASURED AND PRESENTED UNDERSTANDING THE DEMAND CURVE

The demand curve will move downward from the
left to the right, which expresses the law of
demand—as the price of a given commodity
increases, the quantity demanded decreases, all
else being equal.

Note that this formulation implies that price is
the independent variable, and quantity the
dependent variable
DEMAND CURVE
The graph of the demand curve, price (P) is
measured at the vertical or Y axis while the
quantity demanded (QD) is measured at the
horizontal or X axis.
Each pair of price and the quantity demanded is
plotted on a point and then the points are
connected to come up with the demand curve.
The curve slopes downward northwest to
southeast.
LAW OF DEMAND
The demand curve shows the inverse relationship
of price and quantity demanded.
This relationship is called the Law of the Demand.
“When the prices of a product is increased, and
the other things are kept constant, buyers tend
to buy less of the commodity. On the other
hand, when the price decreases, buyers tend to
buy more of the commodity.”
A consumer tends to buy more of a product or
service if its price falls in due to two factors:
1. INCOME EFFECT – as price falls, the
purchasing power of the consumer is
enhanced because they can buy more of a
product.
2. SUBSTITUTION EFFECT- likewise, as price
falls, the product becomes less expensive
compared to similar products so that the
consumer tends to buy more of product
and less of a similar product.
DETERMINANTS OF THE DEMAND
In the previous graphs; price is assumed as
the most important factor affecting
demand. Observers show however, that
there are other factors that can do affect
demand. Other factors that influence
demand are as follows:
1. TASTES AND PREFERENCES
2. NUMBER OF BUYERS
3. INCOME
4. PRICES OFRELATED GOODS AND
SERVICES
5. EXPECTATIONS
ADDITIONAL FACTORS OF DEMAND
Price changes of related goods or services may
also affect demand. If the price of one product
rises, demand for a substitute may rise, while a
fall in the price of a product may increase
demand for its compliments. For example, a rise
in the price of one brand of coffeemaker may
increase the demand for a relatively cheaper
coffeemaker produced by a competitor. If the
price of all coffeemakers falls, the demand for
coffee, a complement to the coffeemaker market,
may rise as consumers take advantage of the
price decline in coffeemakers.