MATER DEI ACADEMY

APPLIED ECONOMICS
THE ECONOMIC SYSTEM

INCLUSIVE DATES: 6 - 8 days QUARTER: 2nd Semester

LEARNING COMPETENCIES

o Explain how applied economics can be used to solve economic problems;

o Analyze the solutions to the economic problems;
o Know the operation of Opportunity cost
VALUES INTEGRATED

Management and leadership strength Creativity / Resourcefulness

Trustworthy personality Responsible Cyber citizenship
Disciplined
TERMS TO REMEMBER

Traditional economy
Planned Economy
Market Economy
Mixed Economy

GETTING STARTED

The Economic System

There are four commonly used economic systems that help solve the basic economic problems.These
are:

Traditional Economy
The earlier method of allocating resources consisted of traditional patterns. Hence,the forces of tradition
answered the fundamental questions. In an economy bounded by tradition or customs, young people followed
the footsteps of their ancestors in the choice of occupations. What to produce, how to produce and for whom
to produce, all were governed by past behavior patterns. As a result,there was little change in the pattern of
production, in the composition of the output and in the techniques of production. Thus, all production questions
were answered by the prevailing traditions of an economy. However, such static environment does not exist
today.
In a traditional economy, everything is mostly based on what is popular, production responds to what is
in demand from the people. An example of this would be in the prehistoric times where farmers grazed animals
and produced food. Enough food would be produced for the people living in the area. A farmer would produce
the food for the people and the farmer would get something in return.
 In some parts of the Philippines, this type of economic system still permeates. Some families or tribes
are self-sufficient. They produce goods and services only for their own consumption. If ever there are surpluses
in their goods, they resort to barter, the method of exchange of goods which is of equal value.

The Market Economy

The exchange and trading of goods and services is what takes place in a market economy. This is a form
of a free market hence also being known as “free market economy". In a market economy, what to produce is
determined by what the people demand. For example, in a city with no roads, cars would not need to be
produced or traded due to the fact that there is no demand for them. In terms of how to produce, a market
economy is the complete opposite of a planned economy where the government decides what to produce and in
what quantities to produce, a market economy allows for much more freedom. Everything in a market economy
is produced for people in exchange in goods or services. An example would be an individual purchasing an
automobile due to their need of transportation; money would need to be exchanged for the product. In a market
economy, there is something known as the “invisible hand” which represents the supply and demand market
forces. This defines what is produced, in what quantity and at what price. One example of a country, which
embraces such an economy, would be the United States of America, which actually includes more market
economy traits than Western Europe countries.
Transactions in this market occur when both buyers and sellers agree on the price of a given good or
service. Government intervention is minimal and confines itself more on regulation

People are free to engage in business if they so decide. However, they have to face some risks and
consequences in a competitive market. The success of your business largely depends on the demand for the
product you are selling and at the same time, the price of the good.

Planned Economy
A planned economy is the complete opposite of a market economy. A market economy is towards
production being based on the supply and demand, or the “invisible hand”, a planned economy is mostly
government controlled with the government deciding everything. In a planned economy, the government
decides what gets produced, at what quantity and what price. Planned and market economies blend together in
mixed economies. In this case, the government would have some input in such economic problems; however,
the rest of the activities will be driven by the decisions of the buyers and sellers. No country has a completely
free economy in a strict sense, meaning that there will always be some government involved, however we label
the market economies with the fact that the government intervening is very minimal. Two countries, which are
known as one of the best examples of, planned, or command economy would be China as well as former USSR.
Despite the fact that there are many countries today switching from such an economy to mixed or free
economies, other nations including North Korea and Cuba still embrace this economy in its full form. The state-
owned as well as the private enterprises in such economies receive guidance and directives from the
government regarding economic problems including what to produce, how to produce and for whom to produce.

Mixed Economy
In a mixed economy, both capitalism and socialist economies are found. This economy is basically a
mix of a rather free economy such as a market combined with a planned economy as well as avoiding the issues
with capitalism and socialist economies. Most countries have a mixed economy including the United States of
America, the Philippines, as well as Cuba. It was mentioned earlier that the United States embraces a market
economy and Cuba goes by the planned economy, however, it must be taken into consideration that no country
strictly uses one economy. For example, if a country had a strict market economy there would be no taxes,
environmental laws, government owned businesses and other aspects of that nature.
Opportunity Cost
Opportunity Cost is the value of what is foregone in order to have something else. This value is unique
for each individual. You may, for instance, forgo ice cream in order to have an extra helping of mashed
potatoes. For you, the mashed potatoes have a greater value than dessert. But you can always change your mind
in the future because there may be some instances when the mashed potatoes are just not as attractive as the ice
cream. The opportunity cost of an individual's decisions is determined by his or her needs, wants, time and
resources (income).

GENERALIZATION

An economic system is a means by which societies or governments organize and distribute available
resources, services, and goods across a geographic region or country. Economic systems regulate the factors of
production, including land, capital, labor, and physical resources. An economic system encompasses many
institutions, agencies, entities, decision-making processes, and patterns of consumption that comprise the
economic structure of a given community.