Module 5
Economic
System and
Production
Possibilities
Frontier
EXPECTATIONS
• 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.
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
• Mixed Economy
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.
• 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.
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.
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,
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
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.
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).
• 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.
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.
