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.