LESSON 1.

FUNDAMENTAL ECONOMIC PROBLEMS AND ECONOMIC SYSTEM

Objectives:
1. To identify and briefly discuss the four basic economic problems
2. To define economic system
3. To identify and describe the types of economic system

Fundamental Economic Problems

Economic problems exist because of two fundamental facts: resources are limited and

human wants are unlimited. Human wants cannot all be possibly satisfied because resources

are scarce. In every nation, whether it is rich or poor, whatever, is the form of government,

and what economic system it has, the four basic economic problems related to the allocation

and distribution of resources must be addressed.

What goods are to be produced?

This refers to the choice of goods and services that the economy should produce.

Basic needs of the people are given toap priority. This problems exists because resources are
For survival
scarce. The decision of what goods and services to be produced would depend on what is

needed and what is wanted. It also depends on culture, availability of resources, and climate

How much goods are to be produced?

Producing all goods that people want to their satisfaction is not really possible

because resources are limited. A system of priorities has to be established to remedy such

problem. No economy can produce goods and services sufficient to satisfy all members of

economy, and we have to make a choice about the types of goods and services to be

produced.
How are goods and services produced?

This refers to the choice of resources and the particular technique used in producing

goods or services. This is a decision on the combination of resources to be used in production

and the technological manner in which production will take place. The problem of production

technology or method of production exists because goods can be produced with different

factor combinations and different techniques and production technology.

For whom are goods produced?

This refers to the choice of who will benefit from the production of goods and

services.

In a pure market economy or capitalism where resources are privately owned and decisions

are made by the people themselves, goods and services are definitely for those who have the

money and are willing to purchase them. Clearly, the rich can purchase all the goods and

services that money can buy and they can acquire more goods and services than the poor.

The Economic System

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. It is composed of people,

institution and their relationships to resources, such as convention of property.

The economic system makes it possible for people to satisfy their numerous and

varied human wants by helping them to decide how to allocate their resources among other
alternative uses. A system exists for a variety of reasons. The family is necessary system

inherent to human nature, which ensures the propagation and development of human race.

The political system is also necessary to make decisions and carry out national endeavor for

the common good.

The Types of Economic System

Traditional economy
Economic problems
It is an economy that answers the four questions on allocation and distribution of

goods based on social customs and how the society has dealt with these questions in the past.

This is basically a subsistence economy. Decisions on what, how, and for whom to produce

are made by referring to the traditional manner of doing things.

Market economy
Answering 2 questions: What and how much product to produce
It is an economy wherein resources ae privately owned and decisions are made by the

people themselves. The system depends on prices set by the conditions of demand and

supply. Competition is supreme, there is consumer sovereignty, and the price of the goods is
Decision is made by private owners
guiding factor for producers to know what and how much to produce.

Command economy

It is an economy where the four questions are all answered by the government. Rather

than giving individuals the chance to decide what they want or need, the government decides

the questions for the country. This type of economy is difficult for the individual because it is

impossible for the government to know exactly what is best for each and every citizen. The

means of production are owned by the government. Its decisions are arrived at planners or

government men who dictate what, how, and for whom to produce
Mixed economy

It is blend of free market economy and government intervention. Such as synthesis is

intended to give incentives to businessmen and to protect the welfare of the consumers. It is

an economic system that answers the four questions both in the marketplace and in the

government. A mixed economy usually involves producers working closer with the

government as what they do in the United States so the US economic system is considerably

more of a market economy. Philippine economy is a mixed economy of decisions-making.

However, it is more on market-oriented rather than command or traditional.

Activity 1.2.1

A. What are the types of economic system? Differentiate one from the other

The types of the economic system are traditional, market, command and mixed

economy. These four types of economic system have a question that should be answered. The

traditional system which uses the old ways or distribution of goods that dealt with the past

and answerable with the four main question on to whom, what and how goods to produced

and how much goods. The market system is owned by the private owners and the people gets

to decides what and how much product and their systems varies on the goods and services

they are producing and serving. Next is the command system wherein the government runs

and decides for their people on the goods and services they need and also the price itself.

Lastly, the mixed system, from the word itself mixed wherein two types of economic systems

combines and this are market and command system. The government decides and the people

are the one who will work in creating or giving goods or services.
 LESSON 1.3

THE CIRCULAR FLOW MODEL

Objectives:
1. To explain the economic activities that take place within the economy
2. To define and explain the circular flow model
3. To describe the interaction between the household and the firm

The interrelationship Between the Household Sector and Business Sector

Economic activities take place within economy. These include production,

consumption, employment, and income generation. They take place through the

interrelationship that exists between two economic units. The household unit which is the

basic consuming unit, and the firm, which is the basic producing unit. Economic activities

refer primarily to production that employs resources such as land, labor, and capital, and

entrepreneurship. The basic processes therefore, can be described as a process of change and

transformation of economic resources into actual goods and services.

Production is the use of economic resources in the creation of goods and services for

the satisfaction of human wants. The use of these economic resources in production is

employment. Whenever resources are used in production, a price is paid to the resource

owners.
The Circular Flow Model

Circular flow of an economy is only a model, a simplification of a complex reality.

However, it is necessary for it to be understood in order to have a clear understanding of the

complexities that are encountered in the economic activities of a nation.

The circular flow of income model, or simply the circular flow, is a model used to

show the flow of resources and income model showing the relationship between money

income and spending for the economy as a whole.

Land, Labor,
Wage, Rent,
Capital
Profit
HOUSEHOLD Consumption unit FIRMProducing unit
Payment for

goods and

Goods and
services

Services
Figure 1.3.1. The Circular Flow Model
Activity 1.3.1
Explain how the model run and circulate. (yellow paper, hand written, and must be
clean and readable)

The two units which are the household and the firm interconnect with each other by the goods

and services that they are offering with each other. The first one is the household that

connects with the firm by means of labor, land and capital. These three has a function which

means that land are the one that will make the building stand wherein you need labors or

worker from the household to do the works and of course, it can not possibly do when there is

no capital or money to put up the business. The firm will now put money to the business and

several expenses should be paid by the firm like the wage of the laborer which will likely the

connection of the household and the rent of the land or building that they put up the business.

And also, the firm gain profit because of the households that consume it. And the cycle goes

on again.

Next is the firm going to household which connects by the goods and services. These

means that the producing unit which is the firm brings goods and services to the household,

the consumption unit for them to use it. The firm are the one that serves something tangible

or non-intangible and the household will be the one to consume what the firm is offering.

And so, with these connections, the household will pay the goods and services that they

received to the firm and the cycle continues.