LESSON 1.

FUNDAMENTAL ECONOMIC PROBLEMS AND ECONOMIC SYSTEM

Objectives:
1. To identify and briefly discuss the four basic economic problems
2. To define economic system
3. To identify and describe the types of economic system

Fundamental Economic Problems

Economic problems exist because of two fundamental facts: resources are

limited and human wants are unlimited. Human wants cannot all be possibly satisfied

because resources are scarce. In every nation, whether it is rich or poor, whatever,

is the form of government, and what economic system it has, the four basic

economic problems related to the allocation and distribution of resources must be

addressed.

What goods are to be produced?

This refers to the choice of goods and services that the economy should

produce. Basic needs of the people are given top priority. This problems exists

because resources are scarce. The decision of what goods and services to be

produced would depend on what is needed and what is wanted. It also depends on

culture, availability of resources, and climate

How much goods are to be produced?

Producing all goods that people want to their satisfaction is not really possible

because resources are limited. A system of priorities has to be established to

remedy such problem. No economy can produce goods and services sufficient to
satisfy all members of economy, and we have to make a choice about the types of

goods and services to be produced.

How are goods and services produced?

This refers to the choice of resources and the particular technique used in

producing goods or services. This is a decision on the combination of resources to

be used in production and the technological manner in which production will take

place. The problem of production technology or method of production exists because

goods can be produced with different factor combinations and different techniques

and production technology.

For whom are goods produced?

This refers to the choice of who will benefit from the production of goods and

services.

In a pure market economy or capitalism where resources are privately owned and

decisions are made by the people themselves, goods and services are definitely for

those who have the money and are willing to purchase them. Clearly, the rich can

purchase all the goods and services that money can buy and they can acquire more

goods and services than the poor.

The Economic System

An economic system is comprised of the various processes of organizing

and motivating labor, producing, distributing, and circulating of the fruits of human

labor including products and services, consumer goods, machines, tools, and other

technology used as inputs to future production, and the infrastructure within and
through which production, distribution, and circulation occurs in a particular society. It

is composed of people, institution and their relationships to resources, such as

convention of property.

The economic system makes it possible for people to satisfy their numerous

and varied human wants by helping them to decide how to allocate their resources

among other alternative uses. A system exists for a variety of reasons. The family is

necessary system inherent to human nature, which ensures the propagation and

development of human race. The political system is also necessary to make

decisions and carry out national endeavor for the common good.

The Types of Economic System

Traditional economy

It is an economy that answers the four questions on allocation and distribution

of goods based on social customs and how the society has dealt with these

questions in the past. This is basically a subsistence economy. Decisions on what,

how, and for whom to produce are made by referring to the traditional manner of

doing things.

Market economy

It is an economy wherein resources are privately owned and decisions are

made by the people themselves. The system depends on prices set by the

conditions of demand and supply. Competition is supreme, there is consumer

sovereignty, and the price of the goods is guiding factor for producers to know what

and how much to produce.

Command economy

It is an economy where the four questions are all answered by the

government. Rather than giving individuals the chance to decide what they want or

need, the government decides the questions for the country. This type of economy is

difficult for the individual because it is impossible for the government to know exactly

what is best for each and every citizen. The means of production are owned by the

government. Its decisions are arrived at planners or government men who dictate

what, how, and for whom to produce

Mixed economy

It is blend of free market economy and government intervention. Such as

synthesis is intended to give incentives to businessmen and to protect the welfare of

the consumers. It is an economic system that answers the four questions both in the

marketplace and in the government. A mixed economy usually involves producers

working closer with the government as what they do in the United States so the US

economic system is considerably more of a market economy. Philippine economy is

a mixed economy of decisions-making. However, it is more on market-oriented

rather than command or traditional.

Activity 1.2.1

A. What are the types of economic system? Differentiate one from the

other
 There are four types of economic system and these are traditional, market,

command and mixed economy. Traditional economy answers the four questions on

allocation and distribution of goods based on social customs and how the society

has dealt with these questions in the past. Market economy is where resources are

privately owned and decisions are made by the people themselves. Command

economy answers all four questions by the government, however, this is difficult for

the individual because there is no chance to decide what they want and need and it

is impossible for the government to know exactly what is best for each and every

citizen. Lastly, mixed economy is a blend of free market economy and government

intervention and it intends to give incentives to businessmen and to protect the

welfare of the consumers.

LESSON 1.3

THE CIRCULAR FLOW MODEL

Objectives:
1. To explain the economic activities that take place within the economy
2. To define and explain the circular flow model
3. To describe the interaction between the household and the firm

The interrelationship Between the Household Sector and Business

Sector

Economic activities take place within economy. These include production,

consumption, employment, and income generation. They take place through the

interrelationship that exists between two economic units. The household unit which is

the basic consuming unit, and the firm, which is the basic producing unit. Economic

activities refer primarily to production that employs resources such as land, labor,
and capital, and entrepreneurship. The basic processes therefore, can be described

as a process of change and transformation of economic resources into actual goods

and services.

Production is the use of economic resources in the creation of goods and

services for the satisfaction of human wants. The use of these economic resources

in production is employment. Whenever resources are used in production, a price is

paid to the resource owners.

The Circular Flow Model

Circular flow of an economy is only a model, a simplification of a complex

reality. However, it is necessary for it to be understood in order to have a clear

understanding of the complexities that are encountered in the economic activities of

a nation.

The circular flow of income model, or simply the circular flow, is a model

used to show the flow of resources and income model showing the relationship

between money income and spending for the economy as a whole.

 Land, Labor,
Wage, Rent,
Capital
Profit
HOUSEHOLD FIRM
Payment for

goods and

Goods and
services

Services
Figure 1.3.1. The Circular Flow Model

Activity 1.3.1
Explain how the model run and circulate. (yellow paper, hand written, and
must be clean and readable)
In the circular flow model that is given, the household are considered to be the
owners of the land, labor and capital. The three scarce resources are then
exchanged to the resource market wherein the firms used these resources in order
to make money. Resources are essential to the firm so they wish to acquire from
household to use to make goods and services that they can sell back to the
household. Firms must also give up something such as wage, rent and profit in order
to acquire resources because there is nothing free when we talk about limited
resources. Household are the ones who buy goods and services from the firms that
can satisfy their wants and needs and for them to have these, they need to pay for
what they get and firms starts to earn profit. It is money that makes the circular flow
functional.