This document discusses key concepts in economics including the three basic economic problems of what to produce, how to produce, and for whom to produce. It also defines four economic systems - traditional, command, market, and mixed - and provides examples of each. Capitalism and socialism are compared as are the concepts of scarcity, opportunity cost, and production possibility frontier.

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.
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 be produced?
What goods and services to be produced?
 It is not always possible to produce 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, anincrease in the quantity
of the said product connotes a decrease in the quantity of another.
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.
For whom these goods and services are 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.

3. 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.
 Capital. The word comes from the Latin word „caput‟ which means „head‟. It
refers to thetangible, physical good (a capital good) that a person or
societycreates 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.
 Entrepreneurshipmeans 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.
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.
 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. Thefisherman‟s capital formation (investment) is measured by
sacrifice consumption (the fish that weren‟t caught for food or clothing).

4.  According to Starr in his book, for a nation as a whole, however, money
represents only a claim on the resources owned by that nation- the real
things like buildings, road, dams, TV, sets, automobiles, and raw materials. If
we are going to count a nation‟s supply of money plus its supply of real things.
Althoughmoney is a means to acquire factors ofproduction and is also a
measure ofwealth, it is not in itself of production.
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.
FOUR ECONOMIC SYSTEMS OR CATEGORIES:
 Traditional Economy
1. Communal land ownership;
2. The leader decides on the management of agricultural production which is
thebasis of the economy;
3. The production, distribution, and use ofeconomic resources are based on
traditional practices;
4. New technologies are not welcomed since they are in contrast with the
traditionalpractices 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.

5. 7. Only the government plays the role in setting legal framework for economic
lifeproduction and distribution of goods andservices;
8. The products or needs of the people are distributed based on priorities set
by thecommittee
 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.
 Market Economy
1. The private sector owns and managesthe 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;
3. It is also known as laissez-faire or free enterprise;
4. There is minimum governmentinterference on decisions pertaining to the
management of the economy (protection of the society against internal and
external aggression);
5. Existence of competition often results to monopoly;
6. There is presence of economic power.

6.  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;
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.
SUMMARY
 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
likeregulatory agencies and executives orders issued bythe president.
Traditional system elements are quietlyobserved, like in the way many young
people choosetheir parents‟ occupation. But in a way, most economic systems
are mixed, although they are usuallyidentifiable as being predominantly of
one type or another.
CLASSIFICATION OF DIFFERENT SOCIETIES
The classification of different societies into traditional, command, market and
mixedeconomic systems spans the entire course of history, but in the last century
the world has been divided into great economic andpolitical systems representing
socialism and capitalism.

7. Capitalism
 Is an economic system in which mostresources are privately owned, people
are free to choose their occupation, thekind and amount of production is
determined by price and peoplesearching for a profit, and there is
substantial amount of competition.
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.
 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.
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. There is no system of wages or profits needed to spur people to work.
Everyone simply takes from what is producedwhatever he or she needs to
live comfortably. Nogovernment or bureaucracy supervises what the people
do.

8. Socialism
 Is an economic system in which the government owns and operates the
major industries of the country. Itmeans 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 thatsocialists hope to overcome
capitalism‟s two importantproblems:
1. The unequal distribution of income and wealth
2. The uneven course of economic growth with periods of BOOM or
BUST
The Circular Flow of Economy

9. 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.
TYPES OF RESOURCES:
1. Society
 Land
 Forests
 Minerals
2. Human
 Mental
 Physical
3. Manufacture Aids to Production
 Tools
 Machinery
 Buildings
4. Commodities
 things produced

10. Types of Commodities:
• Goods
• Services
5. Production
 the act of making goods and services
6. Consumption
 the act of using them to satisfy human wants
Social Costs of Individual Decisions
A persons‟ decision may impose costs, notjust to one, 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.
Production Possibility Frontier
 Scarcity-indicated by the unattainable combination above the boundary
 Choice-can be seen by the need tochoose among the alternative attainable
points along the boundary andopportunity cost
 Opportunity Cost-refers to the cost ofusingthem their best alternatives

11. 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 andservices are not enough to satisfy the
human’s material wants:
 Unlimited human wants
 Limited quantity of goods