THE ECONOMIC SYSTEM

Introduction
The partial satisfaction of the material wants of an
economy’s populace entails 3 basic economic problems
that should be answered by economic system.
3 basic Economic Problems
1. What goods or services should be produce and in what
quantity?
2. How these Goods and Services should be produced?
3. For whom should these goods and services be produced?
Economic System
Refers to a set of economic institution that
dominate a given economy with the main
objective of solving the basic economics
problems.
have significant roles in answering the three
kinds of economic questions. The 4 categories of
economic systems are, Traditional, Command,
Free Market, and Mixed Market Economy.
1. Traditional Economy
 Is one whose economic decisions are made with great influence from past.
Essential Characteristics of a Traditional Economy
a. Communal Land Ownership
b. Leader decides on the Management of agricultural production which is the
basis of the economy.
c. The Production, Distribution, and Consumption are based on the
traditional practices.
d. New technologies are not welcome.
e. Economy is only its third priority, while culture and religion are its
foremost priority.
f. Mines are used to gather raw material for production.
2. Command Economy
 An economic system where the factor of production and
distribution are owned and managed by the government.

The Essential Characteristic of Command Economy

a. Resource allocation is done by the Government.
b. Presence of central planning of all economic activities.
c. There is no free competition.
d. Only the government plays the role in setting legal framework for
economic life production and distribution of goods and services.
e. The products or needs of the people are distributed based on their
priorities set by the committee.
3. Market Economy
An economic system where an individual consumers and
businesses interact to solve the three basic economic problems.
Essential characteristic of Market Economy
a. The private sector owns and manages the means of production.
b. Price system in a market structure applies to determine how
much will be paid for a certain commodities or service.
c. It is also known as the laissez faire or free enterprise.
d. There is a minimum government interference on decision.
e. There is the presence of economic power.
4. Mixed Economy
 A combined elements of traditional, command and free market, that both
private and public institution exercise economic control.

Essential Characteristic of a Mixed Economy are:

a. The means of production are owned and controlled by the private sector by
the private sector as well as the government.
b. The people decide on the economic activities within the economy.
c. The combination of the best features of capitalist and command are
observable in the market.
d. 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.
 United States of
America

Selected Sweden
Mixed Economy
Philippines
Countries
Japan

under Singapore

Hong Kong Market Economy

Various
China
Economic North Korea
Command Economy
Cuba
System
Mongolia
Traditional Economy
Afghanistan
THE CIRCULAR FLOW OF ECONOMY

How do Economy perform?

What are the components and how they flow to make
up a dynamic economy?
How the three basic economic problems interact and
how the people’s need are provided.

Economic Process
It is the transformation of economic resources into
finished goods and services.
 Goods
and
Service

The Circular
Business
flow of Household
Sector Production and Sector
Payment

Payment for
purchased of
Goods and
Services
THE LAW OF SCARCITY
Every society faces the undeniable truth that resources are
scarce relative to human wants.
The Law of Scarcity states that goods are scarce because there
are not enough resources to produce all the goods that the
people want to consume.
Commodities – refer to goods that are being produced.
Commodities can be divided into two:
1. Goods – are tangible
2. Services – are intangible
 Production Possibilities Frontier
A combination of two goods that can be efficiently produced by using all
the resources.
It illustrates three concepts;
1. Scarcity – indicated by the unattainable combination above the boundary.
2. Choice – can be seen need to choose among alternative attainable points.
3. Opportunity cost – refers to the cost of using them in their best
alternative choice.
Due to the opportunity, Trade off arises.
Trade – off
Is a situation in which more of one good thing can be obtained only by
giving up another thing.