1.

DESCRIBE THE ECONOMIC

SYSTEM
•Economic system or
economic order , is a system of
production resource allocation
and distribution of goods and
service within a society or a
given geographic area.
 There are two types of
economic system
•Command Economy (or
planned economy) is a type of
economic system where
investment, production and the
allocation of capital goods take
place according to economy-
wide economic and production
plans
•Capitalism ( or market economy)
A market economy is an economic
system in which the decisions
regarding investment, production
and distribution are guided by the
price signals created by the forces of
supply and demand.
THE FUNDAMENTAL ECONOMIC QUESTION

•The Basic Economic Problem

The existence of scarcity
creates the basic economic
problem faced by every society
rich or poor .
1. WHAT goods and
service will be produced?
For example, an economy must
decide whether they should
produced kitchen appliances or
weapons, build and fix road or buy
textbooks for schools.
2. HOW will goods and services be
produced?
For example, should we use
copper or plastic to make
pipes? Should machines be
used to be make clothing or
should workers make it by
hand? Should the power plant
be built closer to the ocean or
inland?
3. WHO will consume the goods and
services?
once the goods and services are
produced, who will get to consume them?
Will people consume them on a first-
come , first-served basis? Should goods be
allocated or given out by height, weight,
religion, age, gender race, looks, strength,
health or wealth? How should the goods
and services be distributed among the
people?
ECONOMIC GOALS AND SOCIETAL VALUES

*Societies or communities
answer the economic question
in different ways.
*Societies look at economic
goals and make decision based
on what is most valued. Some
economic goals the are
considered are:
 Economic Efficiency
-making the most of resources without
waste is an economic goals.

Economic Freedom
-being able to make choices about
which goods and service to produce
and distribute without government
interference or intervention is an
economic goal. This freedom allows
entrepreneurs to take risks and make
choices to start various business.
Economic Security
-knowing that goals and service will
be available when needed. Having a
safety net that protects individuals in a
time of economic disaster.

Economic Growth and Innovation

-Using new ideas and ways of
creating goods and services leads to
growth and a higher. Standard of living
or way of life for all.
2. STRATEGIES FOR DEALING WITH
FUNDAMENTAL ECONOMIC
QUESTIONS
 Four economic systems

1.The Traditional economies

-the rely on habit, custom, or ritual to
decide what to produce, how to produce it,
and whom to distribute it.

2. In a Centrally planned economy

-the central government makes all
decisions about the production and
consumption of goods and services.
3. In a market economy
–economic decisions are
made by individuals and are
based on exchange, or trade.

4. Mixed economies
– are systems that combine
tradition and the free market
with limited government
intervention.
 Comparing Economic System

Economic system
*Traditional
*Market Customs
*Command Individuals
*Mixed Central Government
Individuals with
some
government
involvement
 3. Price Determination in Capitalism

• Capitalism-is an economic system in which

private people, not the government ,own and
run companies. These companies compete
with other companies for business. They
decide what product they want too produce ,
how much they should cost and where to sell
them. Companies do all these things in or to
make profit for their owner. Other names for
capitalism are free-market economy or free
enterprise.
• Capitalist-people who use their money to
start companies or run companies.
 Features of Capitalism
• Private property/household
-they buy there goods from the income
that they have. Some households have more
income than others. Sometimes only one
member of a households has a job, at other
times both husband and wife go to work.
then they have more money to buy goods.
This is the demand side of the economy.
•Voluntary Exchange
-companies and households
get together at markets. Here
they exchange goods, services
and jobs(labour).
 Price System

Demand Falls Demand Rises

Supply Rises Supply Falls

Price Falls Price

Rises
Competitive Markets
-many companies may
sell the same type of
product. Companies will try
to sell better product at a
cheaper price so that they
can get consumers to buy
their products.
HISTORY OF CAPITALISM
•Capitalism has existed in the ancient times. They sell
products to other countries to gain more profit, this was
called mercantilism. The Industrial Revolution bought
many changes and impact to the capitalism industry
since owners during the time preferred to own their
businesses alone. However during the 19th century, Karl
Marx preferred socialist economy where wealth is
distributed, and this became popular. Capitalism almost
collapsed during the Great Depression of the 1930s,
many banks, factories, and stores has closed down.
Today ,Keynes’ theory is widely accepted. The state may
own industries that are important to the country’s
economy. Many people want the government to be
involved to keep the economy rules.
 The circular flow diagram

• In economics, the circular flow

diagram represents the organization
of an economy in a simple economic
model. This diagram contains,
household , firms, markets for
factors of production, and markets
for goods and services.
THE CIRCULAR FLOW DIAGRAM
 The flow of Inputs and
Outputs
• Household provide the factors of
production ( labor , land, and capital) to
the firms through markets for factors of
production. The firms will then use these
factors of production to produce goods
and services to be sold in the markets
for goods and services. The household
will then buy these goods and services
from the firms through the market for
goods and services.
 The Flow of dollars (Money)
• Firms pay wages, rent, and profit to the
households for their supply of the factors of
production in the market for factors of
production. Household will use these
income to spend on goods and services
supplied by the firms in the market for
goods and services. When household spend
money on these goods and services, firms
will earn a revenue which can then be
reinvested to obtain more factors of
production.