Microeconomics module 2

Republic of the Philippines
APAYAO STATE COLLEGE
Luna, Apayao, Philippines 3818
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Module 2
Economic Systems
Each society manages and organizes resources differently to live, flourish,
and develop as a group. Since we are all consumers, resource management
requires us to address four fundamental economic questions/problems: what, how,
where, and for whom to create. To do this, we must build a system that addresses
the four fundamental economic challenges and ensures efficient management of
resources based on what we consider operational in practice.
We need a system primarily concerned with resolving fundamental economic
problems, i.e., a particular set of processes and logical structures that properly
manage products and services.
This module includes knowledge on the various economic systems that serve
as the foundation for managing an economy’s resources.
Objectives:
➢ Define economic systems
➢ Identify and describe the types of economic system
➢ Identify and describe the circular flow model

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1. Traditional Economy
➢ Basically a subsistence economy. A family produces goods only for its
own consumption.
➢ Economic decisions are based on the existing culture and traditions.
Essential Characteristics:
Communal land ownership;
The leader decides on the management of agricultural production which is
the basis of the economy;
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 the foremost
priority.
Types of Economic Systems
These types of societies were isolated until they were absorbed into the
nation and the market system. Therefore, they were also likely to be out of
the mainstream of national, not to mention international, events. They tended
to have a small, relatively homogenous population. Obligations were
reciprocal and explained by kinship ties, rather than by legal contracts. Thus,
they operated under their respective customary laws, that is, through their
respective "traditions." (Mendoza & Tapang 2001)

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2. Command Economy
➢ Command economy is a type of economy, wherein the manner of
production is dictated by the government.
Resource allocation is done by government;
Presence of central planning of all economic activities;
There is no free competition (the government is the only seller);;
The products or needs of the people are distributed based on the priorities set by
the committee. .
Command economy is also called a socialist economy, it is linked with
the communist or Marxist ideology. Under Marxism, the state would abolish
private property and keep the means of production (e.g. factories) under
common ownership, and this would enable a fair distribution of a nation's
wealth. Besides the Soviet Union, countries that practice this economic
system are China and various other socialist countries.

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3. Market Economy
➢ An economic system wherein most economic decisions and means of
production are made by the private owners.
It is also known as laisse’z-faire or free enterprise;;
Existence of competition often results to monopoly;
There is the presence of economic power
Provides a strong incentive for technological advance and enables better products .
Promotes capital accumulation
The market system is also called a capitalist system or a free-market
economy. Countries that operate on this system include the United State of
America (US) and Japan. This system is linked with the ideology of Adam
Smith, in his 1776 book The Wealth of Nations. Accordingly, free trade
would increase economic welfare since firms and resource suppliers in their
pursuit of selfish interests would cause markets to adjust and provide for
the common good.

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4. Mixed Economy
➢ This economy is a mixture of a market system and a command system.
The Philippine economy is described as a mixed economy since it applies
a combination of three forms of decision-making. However, it is more
market-oriented rather than the command or traditional.
➢ In reality, all countries to some extent are actually operating as a mixed
economic system.
How does acting in your own self-interest lead to the common good?
01 02 03 04 05
Companies produce
goods that people want
Companies want to
make profits
High profits attract
new companies to
produce cheaper goods
Consumers benefit
from lower prices
Buying the goods, you
want provides employment
for other people.

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The means of production are owned and controlled by the private sector as well as the
government;
The poeple decide on economic activites within the economy;
The combinations of the best features of capitalist and command economies are
observable in the market;
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.
In a mixed economy, there are several selective government interventions in
the economy, but free competition still exists. The objective of government
intervention is to fix the weaknesses of the prices or market mechanisms of the
laissez-fiare system for the benefits of the people. Thus, both the public and
private sectors exist and play important roles to ensure the growth of an
economy and the welfare of society. (Mun et. al.,2016)

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Circular Flow Model
The circular flow above shows how factors of production are
intermediates in the economic system. For example, households provide their
services to the business sector in an exchange of the payable wages due to their
participation in the production process. The business sector produced the goods
and make it available in the market place, households use what they obtained
from the firms to purchase the goods and services.
The upper half of the model represents the factor market: the place
where factors of production are bought and sold.
The lower half of the model represents the product market: the place
where goods and services produced by businesses are bought by and sold to the
households.

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Module 2 began with discussing the various approaches of managing and
arranging resources for a society to survive, expand, and thrive. This requires a
system for organizing our resources and resolving fundamental economic
challenges in a systematic manner. An economic system is a collection of
economic institutions that govern a particular economy and are critical in
resolving fundamental economic problems.
The traditional, command, market, and mixed economies are the four economic
systems. In reality, every country operates on a mixed economic system to some
extent.
The circular flow model depicts both the factor-of-production and payment flows
SUMMARY

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Lucas, Marilou et al., (2009). Basic Economics with Taxation and Agrarian Reform
Coursebook.” ASCU-Solid North Inc.
Bato, Ma. Jesusa et al., (2011). “Micro Economics Simplified .” Mandaluyong City:
National Bookstore.
Bon Kristoffer Gabay et. al., (2012). “Economics: Concepts and Principles with
Agrarian Reform and Taxation).” Manila: Rex
Bookstore, Inc.
Mun, Har Wai et. al., (2016). Economics. Selangor Malasia: SJ Learning
Mendoza, Lorelie, and Tapang, Bienvenido, (2001). Introduction to Economics.
University of the Philippines Open University
Pettinger, Tejvan., (2017). Cracking Economics. Octopus Publishing Group, Great
Britain.
REFERENCES

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Module 2 Economic Systems
SSE 104
MICROECONOMICS
Activities
Name:____________________________________________
Program & Section: __________________________________
Instructor: CESAR F. DE GUZMAN, JR.

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Features
Types of Economic System
Command
Economy
Tradition
Economy
Market
Economy
Mixed
Economy
Ownership of the
factors of
production
Decision making
process
Decision maker
Activity 2-1
Fill up the table to summarize the characteristics of the four types of economic system.

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Activity 2-2
Having your knowledge in economic systems, site some examples why
does the Philippines is considered a mixed type economy? List them
down on the answer sheet below:
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
______________________________________________________________________
_____________________________________

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------------ 1. Rent
------------ 2. Profit
------------ 3. Taxes
------------ 4. Wages
------------ 5. Salaries
------------ 6. Stipend
------------ 7. Commission
------------ 8. Interest
------------ 9. Tips
------------ 10. Bonus
Activity 2-3
Identification. Identify the earners of the following income:

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Activity 2-4
Make a process map on the circulation of rice using the circular flow
model. Illustrate where rice are being produced and how they are
being distributed in the market.

Microeconomics module 2

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