ST.

MARY’S COLLEGE OF MARINDUQUE

Isok 1, Boac, Marinduque

Integrated Basic Education Department

SY 2020 – 2021

Subject Applied Economics Quarter 3 Module No. 3

Level 12 Duration 2 weeks Days

Topic Allocation and Economic Systems

I. OBJECTIVES

1. Define and explain the term “allocation.”

2. Critically examine the methods and mechanisms of allocation under the different economic
systems.
3. Compare and contrast the different economic systems.

II. CONCEPT DEVELOPMENT

Explore

The scarcity of resources poses a serious challenge in society's effort to address human wants. As a
result, various ways of allocating scarce resources have evolved over time. While engaging in an economic
activity, various decisions have to be made by an individual, household, firm, and the government. In
general,
these pertain to how the scarce resources such as land, labor, and capital are used. Allocation is the
process of identifying how scarce resources are to be apportioned such that the wants and needs of
individuals in society are addressed. Efficient allocation of resources would require that competing uses of a
scarce resource be taken into account. Scarce resources should be used to produce goods and services
that will give the highest benefit to the greatest number of people.

Basic Problems of the Economy

In places where modern cities in the Philippines are located, farming used to be the primary source
of livelihood. The farm lands were later on converted into commercial and residential areas. People decided
to leave farming behind and chose to be employed in factories that produced clothes, furniture, vehicles and
others. Firms later on replaced labor with capital by relying on machines. Such changes in allocation of
scarce resources are encompassed in the three basic problems that any economy has to deal with-what,
how and for whom.
The problem of "what" refers to the question of what goods and services to produce and in what
quantities. The changes in expenditure patterns should be kept in mind in answering this question. Currently
an average household in the Philippines spends almost P60 of every P100 income for food. What types of
food should be produced and in what quantities. The problem of how refers to the matter of how to produce
the goods and services. One good illustration is deciding whether to employ a machine or human labor

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when producing a good or a service. An important question is why some factories use computerized
machines for almost all the productive activities while some factories employ mostly labor for production.
Meanwhile, the problem of "to whom pertains to the distribution of the produced goods and services.
These are some of the related questions: What is the best way to allocate the goods and services produced
among members of society? Who should receive the expensive clothes, pieces of furniture, and
automobiles?

Types of Economic Systems

Different societies use different ways to solve the three basic economic problems. Over time, these
emerged four economic systems each with its own distinct way of addressing the problems—traditional,
command, market, and mixed. There is an ongoing debate on what economic system produces the most
efficient outcome. The table below shows the comparison of the different economic systems:

Table 1
Comparison of Different Economic Systems

How would it be For whom to

Economic System What to produce?
produced? produce?

According to tradition, Based on tradition, Centered on tradition,

Traditional
culture and customs. culture and customs. culture and customs.

Decided by the According to the According to the

Market individual according to individual. individual.
the market.
According to the state. According to the state.
Command Decided by the state.

According to the state

Decided by the state According to the state
Mixed and the individual.
and the individual. and the individual.

1. Traditional Economy
An economy in which decisions are based on a larger socio-cultural system shaped by customs,
traditions, and religious beliefs is called a traditional economy. In this case, individuals respond to the
three basic problems based on what they are accustomed to do-may be it products, way of production,
and allocation of products. In a traditional economic system, innovation in products and processes and
the betterment of quality of life take longer. Trade in a traditional system is commonly direct and does
not require fiat money; goods and services are commonly traded using the barter system.
Indigenous tribes living in the remote areas of the Philippines may have a traditional economic
system. The Batak tribe in Palawan is one example. Bataks seldom leave the mountains where they live.
Males sell rattan, honey, and all sorts of exotic things for a living while females make handicraft like
baskets and necklaces. Bataks are self-sufficient and they plant and harvest their own rice, together with
cassava and other crops.
2. Command
If the government makes most of the decisions on how to address the three basic economic
problems, the economy is operating in a command economy. This power of the government comes from
owning almost all the factors of production. It is the government who runs trade in the economy, so the

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 decision of what to produce and at what price to sell comes from the government. It is the government
which decides what resources to use in producing the goods. A command economy fails to address the
emerging needs of citizens especially when what is produced is consumed largely by those on the top of
the hierarchy.
A command economy is usually led by a dictatorial or a totalitarian government. This means that
the government has the power to implement all its decisions, including those concerning the economy.
Some of the most famous command economies in history are the Union of Soviet Socialists Republic
during the time of Stalin (1922-1953), China led by Mao Zedong (1945-1976), and Cuba led by Fidel
Castro (1976-2003).
3. Market Economy
Decision-making in a market economy comes from the activities of consumers and producers
whose exchanges in the market decide what, how, and for whom. Laissez-faire economy is an extreme
case in which the government does not intervene at all in the economic activities of buyers and sellers.
The firms produce goods and services that are bought by consumers creating profit for sellers
and firms. Buyers decision on what to buy and firms decision on what is most profitable answer the
question what he desire to gain profit, in turn, answers "how" firms use techniques of production that are
least costly. The answer to "for whom depends on the income of the consumers-whoever is willing and
has the ability to buy the commodity will obtain the product. Unlike traditional economy, indirect trade is
widespread in a market economy; the products of firms reach buyers through traders.
Although the market allows for changes in the preferences of buyer and sellers, a usual criticism
against market economies is the inequality in the distribution of income. Because income dictates who
will receive the goods, those who have low income may not receive enough goods and services for their
basic needs while those who have high income may receive more than what they need. One of the most
commonly used examples is the market economy during the Industrial Revolution in Great Britain (late
18th century to early 19th century) that eventually spread to the Western Europe and the United States.
During the Industrial Revolution, many factories that were free from government intervention emerged.
But the hands off policy of the government resulted in extremely low wages, child labor, and
unacceptable working conditions in the factory.
4. Mixed Economy
Almost all countries nowadays do not fit in any of the first three systems. These countries are
mixed economies that promote the "invisible hand" of the market exchanges but at the same time the
government plays an important role in regulating the market and providing needed goods and services.
In modern times, mixed economies have three general characteristics. First, specialization of individuals
and firms is widespread in their area or expertise. The various activities are then linked by trade. Thus,
economic activities are spread among various actors. Note that the products in markets are
manufactured by firms. A cellular phone, for instance, may have been designed in the United States but
is assembled in China using materials from Taiwan.
Second, money facilitates the trade in goods and services in the market. Without money, trade
will be limited because the goods and services have to be traded through barter.
Third, modern mixed economies strive to capital expansion such as the construction of new
factories or the acquisition of new machines. Capital improves the capacity of the labor force and helps it
to produce more. However, in order to acquire capital, current spending has to be restrained and the
savings have to be invested. The three aforementioned characteristics have to be guided and shaped by
government regulation. In the modern mixed economies, most decisions are made in the market but the
government regulates the functioning of the market.

III. REFERENCES

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 A. Books/Articles
Balitao, Bernard et.al. 2015. Philippine Economy and Development. Quezon City: Vibal Group,
Inc.
Carnaje, Gideon P. 2016. Applied Economics. Quezon City: Vibal Group, Inc.

LEARNING ACTIVITY SHEETS

Name: _______________________________ Subject: __________________

Grade & Section: _______________________ Name of Teacher: __________________

A. Directions: Explain your answer briefly and directly on the question below.

1. What do you think is the best economic system for you?

2. What do you think is the economic system that best suits the Philippines? Why?

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