ECON 2 PRINCIPLES OF ECONOMICS 2

THE TYPES OF ECONOMIC SYSTEMS AND OPPORTUNITY COST

Lesson 3

Types of Economic Systems

1. The Traditional Economy

 This is a subsistence economy. A family produces everything that it consumes. Decisions on what,
how and for whom to produce are made by referring to the traditional manner of things. Production is
carried on in the methods used by the forefathers, and is therefore very primitive. This type of
economic system is very backward because it does not allow for change.

2. The Command Economy

 The means of production are owned by the government. Government planners dictate what, how and
for whom to produce.

3. The Market Economy

 The resources are privately owned and decisions are made by the people themselves. Since every
consumer arrives at his own decision, the system is coordinated through an interlocking of network of
markets and prices. The system depends on prices set by the conditions of demand and supply.
Competition is supreme; there is consumer sovereignty, and the price of goods is the guiding factor for
producers to know what and how much to produce.

4. The Mixed Economy

 An economy that applies a mixture of the forms of decision-making. However, it is more market-
oriented rather than command or traditional. The Philippines adopts the mixed economy.

The Price System and Its Role in the Basic Economic Problems

DEMAND FOR GOODS GOODS SUPPLY OF GOODS

AND SERVICES MARKET AND SERVICES

PESO VOTES
COST OF PRODUCTION

CONSUMERS WHAT?
HOW? PRODUCERS
FOR WHOM?
RESOURCE OWNERS

Capital Capital
Labor RESOURCE Labor
Land MARKET Land

Opportunity Cost

When one makes a choice, there is always an alternative that has to be given up. For example, a producer
who decides to produce shoes, gives up other goods that could be produced with the same resources; a student
who buys a book with his limited allowance, gives up the chance of dining out or watching a movie; or an MBA
graduate who decides to teach, gives up his salary he would have earned had he worked in a multinational
company. The values of these alternatives given up are referred to as opportunity costs.

INSTRUCTOR: NIÑA MAE BIANCA J. MARTIN LESSON 3 PAGE 1

 ECON 2 PRINCIPLES OF ECONOMICS 2

Example on Opportunity Cost:

You have a weekly food allowance of ₱300. This week, you have decided to spend it on a combination of colas
and chicken sandwiches. In the school canteen, a cola costs ₱10 while a chicken sandwich costs ₱30, giving you the
following alternatives.

Number of Chicken
Number of Colas
Sandwiches
0 10
3 9
6 8
9 7
12 6
15 5
18 4
21 3
24 2
27 1
30 0

Colas

30 Consumption Possibilities Line

27

24

21 Let’s say that your usual choice is a

combination of 15 colas and 5 sandwiches.
18
This week, you have decided to eat 1 more
15 sandwich. You will have to give up 3 colas to
do so, and this is your opportunity cost.
Opportunity Cost
12

1 2 3 4 5 6 7 8 9 10 Sandwiches

INSTRUCTOR: NIÑA MAE BIANCA J. MARTIN LESSON 3 PAGE 2