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Module 5-in-ABM-Applied Economics

Bachelor of Science in Psychology (University of San Jose - Recoletos)

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Applied SENIOR
HIGH
Economics SCHOOL

Self-Learning
Module
Economic System and 5
Production Possibilities Frontier
Quarter 3

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Applied Economics
Quarter 3 – Self-Learning Module 5: Economic System and Production Possibilities
Frontier
First Edition, 2020

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Published by the Department of Education - Schools Division of Pasig City

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Applied SENIOR
HIGH
SCHOOL
Economics

Self-Learning
Module

5
Quarter 3

Economic System and

Production Possibilities Frontier

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Introductory Message

For the facilitator:

Welcome to the Senior High School 3 Applied Economics Self Learning Module
on Economic System and Production Possibilities Frontier!

This Self-Learning Module was collaboratively designed, developed and

reviewed by educators from the Schools Division Office of Pasig City headed by its
Officer-in-Charge Schools Division Superintendent, Ma. Evalou Concepcion A.
Agustin, in partnership with the City Government of Pasig through its mayor,
Honorable Victor Ma. Regis N. Sotto. The writers utilized the standards set by the K
to 12 Curriculum using the Most Essential Learning Competencies (MELC) in
developing this instructional resource.

This learning material hopes to engage the learners in guided and independent
learning activities at their own pace and time. Further, this also aims to help learners
acquire the needed 21st century skills especially the 5 Cs, namely: Communication,
Collaboration, Creativity, Critical Thinking, and Character while taking into
consideration their needs and circumstances.

In addition to the material in the main text, you will also see this box in the
body of the module:

Notes to the Teacher

This contains helpful tips or strategies that
will help you in guiding the learners.

As a facilitator you are expected to orient the learners on how to use this
module. You also need to keep track of the learners' progress while allowing them to
manage their own learning. Moreover, you are expected to encourage and assist the
learners as they do the tasks included in the module.

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For the learner:

Welcome to the Applied Economics Self Learning Module on Economic System

and Production Possibilities Frontier!

This module was designed to provide you with fun and meaningful
opportunities for guided and independent learning at your own pace and time. You
will be enabled to process the contents of the learning material while being an active
learner.

This module has the following parts and corresponding icons:

Expectations - This points to the set of knowledge and skills

that you will learn after completing the module.

Pretest - This measures your prior knowledge about the lesson

at hand.

Recap - This part of the module provides a review of concepts

and skills that you already know about a previous lesson.

Lesson - This section discusses the topic in the module.

Activities - This is a set of activities that you need to perform.

Wrap-Up - This section summarizes the concepts and

application of the lesson.

Valuing - This part integrates a desirable moral value in the

lesson.

Posttest - This measures how much you have learned from the
entire module.

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EXPECTATIONS

After going through this module, you are expected to:

1. differentiate the economic systems;
2. understand the production possibilities frontier; and
3. apply the concept of opportunity cost and trade-off in the real world scenario.

PRETEST

Directions: Choose the letter of the best answer. Write the letter of your answer on a
separate sheet of paper.

1. Which of the following statements is TRUE about opportunity cost?

a. Opportunity cost is the same as trade-off.
b. Opportunity cost is the foregone benefit in choosing the best
alternative.
c. Opportunity cost happens when you sacrifice one thing to obtain
another.
d. None of the above
2. Which of the following statements is TRUE about trade-off?
a. Trade-off is the same as opportunity cost.
b. Trade-off happens when you sacrifice one thing to get something.
c. Trade-off is the benefit in choosing the best alternative.
d. None of the above
3. Which of the following group is the classification of economic systems?
a. Traditional, Command, Market, and Mixed
b. Agricultural, Industrial, Technological, and Developmental
c. First World, Second World, Third World, and Fourth World
d. None of the above

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4. Which of the following is NOT TRUE about barter system?

a. It refers to the exchange of goods and services without the use of

money.

b. It is an old form of commerce.

c. It is evident in traditional economy.

d. None of the above

5. Which of the following statements best describes the production

possibilities frontier?

a. It shows different combinations in producing two goods.

b. It is the production schedule of a good.

c. It reflects the possible solution to the problem.

d. None of the above

RECAP

Directions: Identify the following terms in each statement. Re-arrange the jumbled
letters to get the correct answer and write it on the space provided.
__________1. The owner of the land will receive this kind of payment. T E R N
__________2. This is the country’s top export product. T E R E N O C S C L I
__________3. It is also known as factors of production. O R C U E E S R S
__________4. This is received by the entrepreneurs. I F P T O R
__________5. The question that answers the kind of products wanted by the society.
OHAERDTWTOCPU

__________6. The top export agricultural product of the Philippines. N A A A B N

__________7. It is payment for the use of capital. S T I R T N E E
__________8. It refers to the special skills needed to produce goods and services.
TUSHENRPEPNREIRE

__________9. It refers to the man-made materials. L A I T C P A

__________10. It includes machineries, factories, buildings, and equipment.
ADILXIPFACET

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LESSON

We know that the main concern of economics is to allocate efficiently the

limited resources to satisfy the desires of the people. To properly distribute the
resources, economists came up with basic questions that the management or policy-
makers must answer. These questions will address the concern of economics,
however, the answer depends on the economic goals of the country and the type of
economic system it has.

This module will further discuss the different economic systems and the
production possibilities frontier which may help the individuals, businesses, and
policy-makers to better understand the importance of efficient and effective
management of resources.

Economic System
The economic system determines how resources are being distributed to the
society. There are four types of economic system: traditional economy; command
economy; market economy; and mixed economy (Argawal, 2020).

1. Traditional Economy

The traditional economy is the most basic type of economic system and
considered as the old form of economic activity. Many countries in the world still
adopt this economic system. The basic economic activities of this system are engaged
in agriculture such as farming, fishing, and the like. People are living in the rural
areas and get their needs mostly on the natural resources.

This economy adopts the old form of commerce which is the barter system.
Bartering is the exchange of goods and services between two or more parties without
the use of money (Kenton, 2020). If the household has a less supply of rice but
abundant in corn products, it can barter their corns with others who have surplus
in rice. In general, the way of life in a traditional economic system is simple. However,
the disadvantage of this economic system is lack of technological access.

2. Command Economy

In a command economy, a large part of the economic system is controlled by

a centralized power of the government. Since the government is a central feature of
the economy, they involve everything from planning to redistributing resources to
the society. It is among the theories of politics and economy of Karl Marx. In this
case, the government is not only involved in making all decisions but it is also
included in the price formulation and control.

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This type of economic system dictates and answers the basic questions in
economics. This capability also means that the government usually owns the factors
of production and the major industries like utilities, transportation, and
telecommunication.

In a command system, people work for the public goods. The interests and
profits are shared amongst the citizens, hence socialism applies in this system. The
social welfare is a top priority, as there are free and equal access to education,
housing and healthcare for everyone. However, the freedom and entrepreneurial
spirit are not evident because the government has the full control of major industrial
resources.

3. Market Economy

In a free-market economy, firms and households act in self-interest to

determine how resources get allocated, what goods and services need to produce and
who buys the products. This system is opposite to how a command economy works.

There is no government intervention in a pure market economy. This

mechanism is called laissez-faire or let alone policy. It is a French word for "leave to
be", this means that the government do not intervene the market activities, hence,
the policy is favorable to the capitalists. A business’ goal is to make maximum profit,
however, there is a rigid competition in the market that offers the similar products.
This is an advantage for the consumers because there will be many alternatives to
choose from. Adam Smith’ invisible hand dictates the prices of the goods and services
3 based on the demand and supply. Consumers pay the highest price they want to,
and businesses only produce profitable goods and services.

There is a lot of incentives for entrepreneurship. Businesses invest heavily in

research and development for constant innovation as companies compete to provide
better products for consumers. One of the disadvantages of pure market economy is
lack of focus on societal benefit which leads to higher income inequality.

4. Mixed Economy

A mixed economy is a combination of different types of economic systems. This

system is commonly a mixture of market economy and command economy. It is also
known as Keynesian Economic System or Dual Economic System. There is a
government intervention while everyone has freedom to choose and opportunities to
innovate. Individuals have the freedom to enter the market. Unlike the free market
where the price is formed by supply and demand, in this system, the price is
controlled as there is the motive to make a profit without sacrificing the social
welfare.

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In mixed economy, the government provides environmental protection,

employment standards, competition policies, and standardized welfare system. The
government is usually involved in the regulation of private businesses. The idea
behind a mixed economy was to use the best of both worlds 3 incorporate policies
that are socialist and capitalist.

Trade-off and Opportunity Cost

In economics, trade-off means the exchange in which a person sacrifices one

or more things for getting a particular product, service or experience. It is a deal that
arises as a compromise, wherein in order to obtain a certain aspect we have to lose
another aspect.

For example:

Suppose a company wants to start a new project, which requires huge

investment and other resources. The trade-off entails the reduction in certain
expenses, in order to invest in the new project. There is an exchange of
resources from expenses to the new project. Hence, trade-off implies the way
forsaking one or more desirable alternatives, in obtaining a specified outcome.

Trade-offs create opportunity costs, one of the most important concepts in

economics. Whenever you make a trade-off, the thing that you do not choose is your
opportunity cost. It refers to a benefit that a person could have received, but gave up
to take another course of action. An opportunity cost represents an alternative given
up when a decision is made.

For example:

Suppose after pursuing Bachelor’ Degree in Business Administration

you have two options: (1) to start your own business and earn Php20,000 per
month; or (2) join in a company and get Php25,000 per month. If you
commence your own business you will earn Php20,000, but you will not get
Php25,000 per month. This Php25,000 is your opportunity cost, which you
will get for serving the company and not starting your own business.

Production Possibilities Frontier

The Production Possibilities Frontier (PPF) shows the combinations of goods

and services that can be produced and those that cannot given the resources. To
illustrate the PPF, we focus on the two goods at a time and hold the quantities of all
other goods and services constant (ceteris paribus).

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Source: Wikepedia

The figure above shows the PPF for <guns= and <butter,= which stand for any
pair of goods and services. Every choice along the PPF involves a tradeoff. On this
PPF, we must give up some guns to get more butter or give up some butter to get
more guns. The PPF makes the concept of opportunity cost precise.

If we move along the PPF from C to D the opportunity cost of the increase in
butter is the decrease in guns. A move from C to D increases butter production by 1
ton. Gun production decreases from 12 units to 9 units, a decrease of 3 units. The
opportunity cost of 1 ton of butter is 3 units of guns. One ton of butter costs 3 units
of guns. A move from D to C increases gun production by 3 units. Butter production
decreases by 1 ton. The opportunity cost of 3 units of guns is 1 ton of butter. One
unit of guns costs 1/3 of a ton of butter. Note that the opportunity cost of guns is
the inverse of the opportunity cost of butter. One ton of butter costs 3 units of guns.
One unit of guns costs 1/3 of a ton of butter. Because resources are not all equally
productive in all activities, the PPF bows outward4is concave.

The outward bow of the PPF means that as the quantity produced of each good
increases, so does its opportunity cost.

Points inside and on the frontier, such as points A, B, C, D, E, F, and Z are

attainable. Points outside the frontier are unattainable.

We achieved production efficiency if we cannot produce more of one good

without producing less of some other good. Hence, points A, B, C, D, E, and F which
along the frontier are efficient.

Any point inside the frontier, such as point Z, is inefficient. At such a point it
is possible to produce more of one good without producing less of the other good. At
point Z, resources are either unemployed or misallocated.

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ACTIVITIES

Activity 1: Economic System

Directions: Think of the country that applies traditional, command, market, or
mixed economy. Classify and describe those countries using the table below.

Traditional Command Market Mixed

Country: Country: Country: Country:

Description: Description: Description: Description:

Activity 2: Production Possibilities Frontier

EBP Construction is producing cements and plywood. The production
function of the economic goods are presented in the table below.

Cement Plywood
Point (‘000 units) (‘000 units)
A 8 0
B 73 70
C 50 30
D 36 44
E 17 63
F 0 80

Directions: Do the following tasks on a separate sheet of paper:

a. Graph the PPF.
b. Describe the nature of point A-F.
c. Describe the nature of point G which is inside the PPF.
d. Describe the nature of point H which is outside the PPF.

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WRAP-UP

To summarize what you have learned in the lesson, answer the following
questions:

1. What are the four economic systems?

2. What is the production possibilities frontier?
3. How will you give apply the concept of opportunity cost and trade-off in real-
life scenario?

VALUING

Reflect on this!

Why some of the brightest students do not get a 100 General Weighted
Average (GWA)?

After sleeping, attending classes, and performing the daily tasks in life, a
student has 8 hours a day available for study and recreation. If the student spends
all 8 hours studying, he/she will get a 100 GWA. However, for every hour of
recreation it lowers the GWA.

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POSTTEST

Directions: Identify the following terms in each statement. Write your answer in the
space provided.

____________1. It determines how the resources are allocated in the society.

____________2. This economic system is controlled by the government.

____________3. An economic system that applies laissez-faire.

____________4. This system is a combination of a market economy and command

economy.

____________5. This economy adopts the old form of commerce.

____________6. It refers to the exchange of goods and services between two or more
parties without the use of money.

____________7. It means the exchange in which a person sacrifices one or more things
for getting a particular product, service or experience.

____________8. It represents an alternative given up when a decision is made.

____________9. It shows the combinations of goods and services that can be produced
and those that cannot given the resources.

____________10. It is achieved when the resources are fully utilized without any waste.
.

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KEY TO CORRECTION

10. Efficiency
FIXED CAPITAL 10. Frontier
CAPITAL 9. 9. Production Possibilities
ENTREPRENEURSHIP 8. 8. Opportunity Cost
INTEREST 7. 7. Trade-off
BANANA 6. 6. Bartering/Barter
5. A WHAT TO PRODUCE 5. 5. Traditional Economy
4. D PROFIT 4. 4. Mixed Economy
3. A RESOURCES 3. 3. Market Economy
2. B ELECTRONICS 2. 2. Command Economy
1. C RENT 1. 1. Economic System
PRETEST RECAP POSTTEST:

References

Agarwal, Prateek, Parul, Karl, Basani, Simona, Ladislau, Jack, Eric, Kevin, Chazz,
Faruku, Chloe, Evan Nottie, Gs, Canyon, Nathan Tataje, Dsh, Nkeletseng
Leteba, Unknown, Unknown, Testimony, and Tyler. "Economic Systems."

Intelligent Economist. May 21, 2020. Accessed July 1, 2020.

https://www.intelligenteconomist.com/economic-systems/.

Bloomenthal, Andrew. "What the Production Possibility Frontier (PPF) Curve

Shows." Investopedia. May 27, 2020. Accessed July 4, 2020.
https://www.investopedia.com/terms/p/productionpossibilityfrontier.asp.

Chappelow, Jim. "Laissez-Faire Definition." Investopedia. January 29, 2020.

Accessed July 4, 2020.
https://www.investopedia.com/terms/l/laissezfaire.asp#:~:text=The driving
principle behind laissez,part of free market capitalism.
"The Four Types of Economic Systems." Cleverism. September 24, 2019. Accessed
July 4, 2020. https://www.cleverism.com/types-of-economic-systems/.

"Guns versus Butter Model." Wikipedia. May 01, 2020. Accessed July 4, 2020.
https://en.wikipedia.org/wiki/Guns_versus_butter_model.

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