Chapter 2

The
Economic System
Economic System
- refers to a set of economic institutions that
dominate a given economy with the main objective of
solving the basic economic problems.
- A system of resource allocation and resource
ownership.

Factors of Production
- These are resources used to produce
goods and services.

4 Factors of Production
1. Land

- The physical space on which production occurs,

together with the natural resources found beneath it.
2. Labor
- The time human beings spend producing goods
and services.
2

Four (4) Factors of Production

3. Capital
- Long-lasting tools used in producing goods and
services.
4. Entrepreneurship

- it means that people are combining the other

three factors of production to create some products
or services to sell.
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Chapter 2

Economic System

Four (4) distinct characteristics of

entrepreneurs:
1. Have the competence to organize factors of
production.

2. Know how to make business decisions.

3. Risk takers.

4. Innovators
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Chapter 2

Economic System

The Three Basic Economic Problems

1. What goods or services should be produced and in
what quantities?
2. How these goods and services should be produced?

3. For whom should these goods and services be

produced?
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Chapter 2

Economic System

Four Types of Economic System

1. Traditional System
- All three (3) problems are solved in somewhat
that same way as families solve similar problems.
Economic decisions are made with the great
influence from the past.

Chapter 2

Economic System

The essential characteristics of a

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;
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Chapter 2

Economic System

The essential characteristics of a

Traditional system:
4.

New technologies are not welcome since they are in

contrast with the traditional practices of their
ancestors.

5. The economy is only its third priority while the culture

and religion are its foremost priorities; and
6. Mines are used to gather raw materials for production.
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Chapter 2

Economic System

Four Types of Economic System

2. Command Economy
- An economic system wherein the factors of
production and distribution are owned and
managed/allocated by the state.

Chapter 2

Economic System

The essential characteristics of a

Command system:
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 the

only seller);
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Chapter 2

Economic System

The essential characteristics of a

Command system:
4. Only the government plays the role in setting legal
framework for economic life production and
distribution of goods and services; and
5. The products or needs of the people are distributed
based on priorities set by the committee.
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Chapter 2

Economic System

Four Types of Economic System

3. Market Economy
- An economic system wherein individual
consumers and businesses interact to solve
the basic economic problems.

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Chapter 2

Economic System

The essential characteristics of a

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 services;
3. It is also known as laissez-faire or free enterprise.
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Chapter 2

Economic System

The essential characteristics of a

Market Economy:
4. There is a minimum government interference on
decisions pertaining to the management of the
economy.
5. Existence of competition often results to monopoly;
and
6. There is the presence of economic power.
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Chapter 2

Economic System

Four Types of Economic System

4. Mixed Economy
- An economic system wherein the economy has
an elements of traditional, command, and free
market is present in varying degrees.

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Chapter 2

Economic System

The essential characteristics of a

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;

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Chapter 2

Economic System

The essential characteristics of a

Mixed Economy:
3.

The combinations of the best features of capitalist and command

economies are observable in the market; and

4.

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.

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Chapter 2

Economic System

Traditional
Economy

Afghanistan
Mongolia

Command
Economy

North Korea
Cuba

Market
Economy

Singapore
Hong Kong

Mixed
Economy

United States of America

Sweden

18