II.

The Economic System

Basic Economic Problems

1. What goods and 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?

Factors of Production (Economic Resources)

1. Land – includes not only the soil for growing plants but also the source of materials and food whether in liquid,
solid, or gaseous form.

2. Labor – refers to human effort either in the form of physical or mental talents.

3. Capital – refers to a tangible physical good that a person or society creates in the expectation that its use will
improve or increase future production.

4. Entrepreneurship – refers to managerial skills or talents of combining the three factors of production to create
products or services.

The Economic System

An economic system refers to a set of economic institutions that dominate a given economy with the main
objective of solving the basic economic problems.

1. Traditional Economy – is one whose economic decisions are made with great influence from the past.

2. Command Economy – the factors of production are owned by the government and the distribution are also
manage by them.

3. Market Economy – individual consumers and businesses interact to solve the economic problem.

4. Mixed Economy – the factor of production are owned and controlled by the private and government sectors.

Characteristics of the Traditional Economic System

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;

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 party priority while culture and religion are its foremost priorities; and

6. Mines are used to gather raw materials for production.

Characteristics of Command Economy

1. Resource allocation is done by the government;

2. Presence of central planning of all economic activities;

3. There is no free competition , the government is the only seller;

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 of the government.

Characteristics of 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
service;

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

4. There is a minimum government interference on decision pertaining to the management of the economy;

5. Existence of competition often results to monopoly; and

6. There is the presence of economic power.

Characteristics of 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;

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 government laws and policies.

Significance of Economic Systems

For instance, in a small village, a group of people found a precious jewel in a public land. Nobody from the
group would like to claim the precious good’s found, so they decided to turn it over to the chieftain. Whom do you
think will own the precious good?