Society decides what

goods and services

WHAT TO PRODUCE
AND HOW MUCH should be produced in
the economy

Production method
ECONOMIC that will be used to
HOW TO PRODUCE produce the goods and
PROBLEM services

Market for the

FOR WHOM TO
PRODUCE goods.
 TRADITIONAL COMMAND
ECONOMY ECONOMY

ECONOMIC
SYSTEM

MARKET ECONOMY MIXED ECONOMY

ECONOMIC SYSTEM

 Means through which society determines the

answers to the basic economic problems mentioned.

Definition:
The institutional framework of formal and informal
rules that a society uses to determine what to produce,
how to produce, and how to distribute goods and
service.
FORMATIVE ASSESSMENT: PICTURE ANALYSIS
TRADITIONAL ECONOMY

 Decisions are based on traditions and practices upheld over years

and passed on from generations.
ADVANTAGES
- No competition
- Living in togetherness
- Low rate of unemployment
- Significant decrease in the rates of crime
DISADVANTAGES
- No gain or profit
- Underdeveloped mindset
- Efficiency and use of resources
- Needs of livings alone
COMMAND ECONOMY
 Authoritative system wherein decision-
making is centralized in the government
or a planning committee.
ADVANTAGES
- Public goods and services provided by
the state (i.e. healthcare, education,
housing)
- Wasteful competition is avoided
- Peaceful labor conditions.
- Welfare of citizens in the primary goal of
the state.
- Business cannot act against the interest
of the people.
COMMAND ECONOMY

DISADVANTAGES
- Poor quality of goods and services.
- Failure to meet set ideals/consumer
needs.
- Lack of innovation.
- Expensive and inflexible government.
- Sacrifice of individual freedom for
society
MARKET ECONOMY
 Democratic form of economic systems.
Based on the workings of demand and
supply, decisions are made on what
goods and services to produce.
ADVANTAGES
- Prices determine by market forces
(supply and demand); competition
brings down prices.
- Consumers can buy whatever they like in
whatever amounts they want.
- Adjust to change easily.
- Little government intervention.
- Great variety of goods and services.
MARKET ECONOMY

DISADVANTAGES
- Does not always provide basic needs of
everyone in society, which can lead
people to slip into poverty.
- May make it difficult for government to
provide adequate social services.
- There are occasionally market failures.
- People can make choices which are
harmful to themselves and to others.
MIXED ECONOMY

 Economic system in which both the

state and private sector direct the
economy, reflecting characteristics of
both market economies and planned
economies.
ADVANTAGES
- State provides the essential services
- Private sector encouraged for profits
- Competition keeps price low
- Consumer choice
- Inefficient business behavior controlled
MIXED ECONOMY

DISADVANTAGES
- Heavy taxes reduce incentives to work
hard or make profits
- Less efficient than private sector
- Excessive control over business activity
can add costs and discourage enterprise.
 COMMAND ECONOMY MARKET ECONOMY
What to Produce? What to Produce?
Whatever the government What people want to buy
decides and sell (if people will
willing to buy it then
business will make it)
How to produce? How to produce?
However the government Laws of Supply and
decides Demand
For whom to produce? For whom to produce?
Class reward system Determine by how much
Waiting in line/rations someone is willing to pay
for it.
TRADITIONAL ECONOMY
What to Produce?
What people need to
survive
How to Produce?
Hunting, farming and
gathering (social roles
determine who does what)
For whom to produce?
Make their own products
(what they have always
made)
CHARACTERISTICS TRADITIONAL COMMAND MARKET MIXED

Role of No formal Decides all Little or no role Government creates

government government other economic activities government laws and regulates
than a sovereign or business activities
feudal lord

Freedom of Freedom of choice in No freedom of Consumers and Limited freedom of

choice so far as resources choice producers have choice given
available to produce freedom of government controls
choice
Ownership of Sovereign or feudal State/public sector Private sector Both public and
natural resources lord private sector
Price Barter was the main Government sets Price mechanism Price mechanism
determination form of trade price system system but regulated
determines price by government
Which sector Traditions and State/public sector Private sector Both public and
answers the basic customs private sector
economic
question.
 SUMMATIVE TEST (1/4 piece of paper)

Describe the type of economic system characterized in each of the following

sentences.
1. Price are based on demand and supply
2. The government decides on what goods should be produced
3. Ancient methods are used in deciding what goods to produce.
4. People enjoy freedom of choice in arriving a decisions on what to buy
5. People have no freedom of choice in arriving a decisions on what to buy.
6. Economy is stagnant, making use of practices in the olden times.
7. Economy is backward because no new technology or production methods are
introduced.
8. It is the most democratic form of economic system.
9. People’s preference are reflected in the prices they are willing to pay in the market.
10. It exists in primitive and backward civilizations.
ASSIGNMENT (1/2 crosswise)

DIFFERENTIATE POSITIVE AND

NORMATIVE ECONOMICS
“The best way to escape from your
problem is to solve them.”