1. The Economics
System Prepared by:
Mary Kathleen Bagasbas
Airah Mae Bedis
John Michael Castillo
El John Caponpon

2. Objectives:
 This chapter examines the subject that many
economists consider to be the fundamental
problems of economics, different economics
systems and its significance, law of scarcity
, and production possibility frontier.

3. Three basic economic problems
1. What goods and services should be produced
and in what quantities?
2. How should these goods and services be
produced?
3. For whom should these goods and services b
e produced?

4. What goods and services to be produced?
 It is not always possible to produced all goods and
services that people want because resources are
limited.
 From the available resources can only be produced
a limited quantity of goods and services, and when
the maximum combinations of goods and services
that can be produced has been reached, an
increase in the quantity of the said product connotes
a decrease in the quantity of the another.

5. How should these goods and services be produced?
 As a rule of thumb, goods and services
must be developed or produced at its
optimum level- that is maximum output
with a minimum input without sacrificing
the quality.

6. For whom these goods and services be produced?
 “Who should consume the produced
goods and services?”
 With this regard to this question, we
should think also whose generation will
receive these goods and services:
the present or the future generation.

7. Four factors of production
 Land is not only the soil for growing agricultural
products. It is also the source of all materials
and food whether in liquid, solid, or gaseous
form, in or above the earth.
 Labor. It refers to human effort, when the effort
is rewarded by some kind of pay. This refers
also to the available physical and mental talents
of the people who have to produce goods and
services.

8. Four factors of production
 Capital. The word comes from the Latin word
„caput‟ which means „head‟. It refers to the
tangible, physical good(a capital good) that a
person or society creates in the expectation
that its use will improve or increase future
production. That is the reason why this term
also connotes the facilities of goods.
 Entrepreneurship means that people are
combining the other three factors of production
to create some products or services to sell.
They hope for profit, but take risk loss or
bankruptcy.

9. Capital Formation
 The process of creating a capital good is
called capital formation. A common term
for capital formation of economics is
investment. Notice again that we are not
talking about money. Outside of
economics, the purchase of assets such
as stocks and bonds is sometimes called
financial investments. This term should
be distinguished from investment as
economics use the term.

10. When a group of fishermen, the labor factor
, takes time to make a boat, it is creating
capital. The fisherman is investing in the
hope that in the future the boat will increase
the number of fish the fisherman catches
, the increase in fish caught representing
the fisherman‟s return on his investment. Th
e fisherman‟s capital formation (investme
nt) is measured by sacrifice consumption (th
e fish that weren‟t caught for food or clothing

11.  According to Starr in his book, for a nation
as a whole, however, money represents o
nly a claim on the resources owned by that nati
on- the real things like buildings, road, dams, T
V, sets, automobiles, and raw material
s. If we are going to count a nation‟s supply of
money plus its supply of real things. Although
money is a means to acquire factors of produ
ction and is also a measure of wealth, it is
not in itself of production.

12. The Economics System
 Refers to a set of economic institutions
that dominate a given economy with the
main objective of solving the basic
economic problems.

13. Four economic systems or categories:
 TRADITIONAL ECONOMY
1. Communal land ownership;
2. The leader decides on the management
of agricultural production which is the
basis of the economy;
3. The production, distribution, and use of
economic resources are based on
traditional practices;

14. Four economic systems or categories:
4. New technologies are not welcomed since
they are in contrast with the traditional
practices of their ancestors;
5. The economy is only its third priority while
culture religion are its foremost priorities;
6. Mines are used to gather raw materials
for production.

15. Four economic systems or categories:
7. Only the government plays the role in
setting legal framework for economic life
production and distribution of goods and
services;
8. The products or needs of the people are
distributed based on priorities set by the
committee

16. Four economic systems or categories:
 COMMAND ECONOMY
1. Resource allocation is done by government.
2. Presence of central planning of all economic activities;
3. There is no free competition (the government is only
seller);
4. Only the government plays the role in setting legal
framework for economic life production and distribution
of goods and services;
5. The products or needs of the people are distributed
based on priorities set by the committee.

17. Four economic systems or categories:
 MARKET ECONOMY
1. The private sector owns and manages
the means of production;
2. The price system in a market structure
applies to determine how much will be
paid for a certain commodity or service;

18. Four economic systems or categories:
3. It is also known as laissez-faire or free
enterprise;
4. There is minimum government
interference on decisions pertaining to the
management of the economy (protection
of the society against internal and
external aggression);

19. Four economic systems or categories:
5. Existence of competition often results to
monopoly;
6. There is presence of economic power.

20. Four economic systems or categories:
 MIXED ECONOMY
1. The means of production are owned and
controlled by the private sector as well as
the government;
2. The people decide on economic activities
within the economy;

21. Four economic systems or categories:
3. The combinations of the best features of
capitalist and command economics are
observable in the market;
4. The problem of distribution of goods and
services and allocation of economic
resources are determined through a
combination of the market and
governmental laws and policies.

22.  In the real situation, economic systems are rarely 100
percent examples of any one system. At present, there
is no economy today applying pure economic system.
Majority, if not all, of these economic systems are
present in varying degrees in any economy. The
Philippines, for example, is best described as a market
system but it contains many command elements like
regulatory agencies and executives orders issued by
the president. Traditional system elements are quietly
observed, like in the way many young people choose
their parents‟ occupation. But in a way, most economic
systems are mixed, although they are usually
identifiable as being predominantly of one type or
another.

23. Capitalism, Communism, and Socialism
The classification of different societies into
traditional, command, market and mixed
economic systems spans the entire course
of history, but in the last century the world
has been divided into great economic and
political systems representing socialism and
capitalism.

24. Capitalism
 is an economic system in which most
resources are privately owned, people
are free to choose their occupation, the
kind and amount of production is
determined by price and people
searching for a profit, and there is
substantial amount of competition.

25. Three aspects of Capitalism:
 The institution of private ownership is generally
accepted. Factories, land, goods, and services are
privately owned by individuals or group of individuals
like stockholders and shareholders.
 Most people are free to pursue their own economic self-
interests, that is, to work for personal gain. For this
reason, capitalism is often called the free-enterprise
system; most people are free to choose their own
occupations.

26. Three aspects of Capitalism:
 Because people are motivated by self-interest, they
compete with one another to get ahead, to make a
better product, to control markets in order to maintain or
obtain a large profit. There is always a struggle for
larger profit lead(usually, but by no means always) to a
high degree of competition among business.

27. Communism
 Holds that the people themselves, not the government
, own the means of production. In a communist state
, everyone works at what he or she can do best. Ther
e is no system of wages or profits needed to spur peopl
e to work. Everyone simply takes from what is produced
whatever he or she needs to live comfortably. No
government or bureaucracy supervises what the people
do.

28. Socialism
 Is an economic system in which the government owns
and operates the major industries of the country. It
means also that the government also decides in those
major industries the answers to the three economic
questions.
 Socialism does not imply dictatorship. Specialism can
exist in democratic countries as well as authoritarian
ones.
 The main reason for socialism‟s existence is that
socialists hope to overcome capitalism‟s two important
problems:

29. Socialism
 The unequal distribution of income and
wealth
 The uneven course of economic growth
with periods of BOOM or BUST

30. The circular flow of economy

31. The law of Scarcity
 Scarcity
-refers to the condition that all resources are
available only in limited supply.
 Law of Scarcity
-states that goods are scarce because there
are not enough resources to produce all the
needs that the people want to consume.

32. Types of resources:
 Society
 Land
 Forests
 Minerals
 Human
 Mental
 Physical
 Manufacture Aids to Production
 Tools
 Machinery
 Buildings

33. Types of resources:
 Commodities
- things produced
Types of Commodities:
• Goods
• Services

34. Types of resources:
 Production
- the act of making goods and services
 Consumption
- the act of using them to satisfy human
wants

35. Social Costs of Individual Decisions
A persons decision may impose costs, not
just to oneself, but also on others.
Consequently, the total cost to society-social
cost-is measured by the opportunity costs
borne by individuals for their own decisions
plus additional costs that may be borne by
others.

36. Production Possibility Frontier
 Scarcity-indicated by the unattainable
combination above the boundary
 Choice-can be seen by the need to
choose among the alternative attainable
points along the boundary and
opportunity cost
 Opportunity Cost-refers to the cost of
using them their best alternatives

37. Production Possibility Frontier

38. Production Possibility Frontier
Trade-off -a situation in which more of one
good thing can be obtained only by giving off
another thing.
Two factors why available goods and
services are not enough to satisfy the
human‟s material wants:
 Unlimited human wants
 Limited quantity of goods