MICROECONOMICS SSE 201
LESSON 2 ECONOMIC SYSTEM What is an Economic System?
▰ An Economic System is a means by which societies or governments organize and distribute available resources, services, and goods across a geographic region or country. Economic systems regulate the factors of production, including land, capital, labor, and physical resources.
Economic System
▰ An economic system encompasses many institutions, agencies, entities, decision-making processes, and patterns of consumption that comprise the economic structure of a given community.
TYPES OF ECONOMIC SYSTEMS 1. Traditional economic system 2. Command economic system 3. Market economic system 4. Mixed system
1. Traditional Economic System
▰ A traditional economy is a system that relies on customs, history, and time-honored beliefs. Tradition guides economic decisions such as production and distribution.
▰ Societies with traditional economies depend on agriculture, fishing, hunting, gathering, or some combination of them. They use barter instead of money.
2. Command Economic System
▰ In a command system, there is a dominant centralized authority that controls a significant portion of the economic structure and government makes all economic decisions.
▰ Also known as a planned system, the command economic system is common in communist societies since production decisions are the preserve of the government.
Advantages of Command Economic Systems
If executed correctly, the government can mobilize resources on a massive scale. This mobility can provide jobs for almost all of the citizens.
The government can focus on the good of the society rather an individual. This focus could lead to a more efficient use of resources.
Disadvantages of Command Economic Systems
It is hard for the central planners to provide for everyone’s needs. This forces the government to ration because it cannot calculate demand since it sets prices.
There is a lack of innovation since there is no need to take any risk. Workers are also forced to pursue jobs the government deems fit.
3. Market Economic System
▰ Market economic systems are based on the concept of free markets. In other words, there is very little government interference.
▰ There is no government intervention in a pure market economy (“laissez-faire“). However, no truly free market economy exists in the world. laissez-faire (let them alone)
Advantages of a Free Market Economy
Consumers pay the highest price they want to, and businesses only produce profitable goods and services. There is a lot of incentive for entrepreneurship. This leads to the most efficient use of the factors of production since businesses are very competitive.
Businesses invest heavily in research and development. There is an incentive for constant innovation as companies compete to provide better products for consumers.
Disadvantages of a Free Market Economy
Due to the fiercely competitive nature of a free market, businesses will not care for the disadvantaged like the elderly, disabled, and those who lack skills. This leads to higher income inequality.
Since the market is driven solely by self-interest, economic needs have a priority over social and human needs like providing healthcare for the poor. Consumers can also be exploited by monopolies.
4. Mixed system
▰ A mixed economy is a combination of different types of economic systems. This economic system is a cross between a market economy and command economy.
▰ In the most common types of mixed economies, the market is more or less free of government ownership except for a few key areas like transportation or sensitive industries like defense and railroad.
- Philippines a mixed economy
Advantages of Mixed Economies
There is less government intervention than a command economy. This means that private businesses can run more efficiently and cut costs down than a government entity might.
The government can intervene to correct market failures.
Governments can create safety net programs like healthcare or social security.
In a mixed economy, governments can use taxation policies to redistribute income and reduce inequality, as well as provide for public goods like roads, community centers, and schools.
Disadvantages of Mixed Economies
There are criticisms from both sides arguing that sometimes there is too much government intervention and sometimes there isn’t enough.
A common problem is that the state run industries are often subsidized by the government and run into large debts because they are uncompetitive.
SHORTAGE AND SCARCITY Shortage
▰ A shortage occurs whenever quantity demanded is greater than quantity supplied at the market price.
More people are willing and able to buy the good at the current market price than what is currently available.
▰ When a shortage exists, the market is not in equilibrium. At equilibrium, the quantity demanded equals the quantity supplied at the market price.
▰ Seasonal Causes of Shortages
There are three main reasons why a shortage can occur:
1. Increase in demand 2. Decrease in supply 3. Government intervention Scarcity
▰ Scarcity is one of the key concepts of economics. It means that the demand for a good or service is greater than the availability of the goods or services. Therefore, scarcity can limit the choices available to the consumers who ultimately make up the economy.
▰ Scarcity is important for understanding how goods and services are valued.
MICROECONOMICS SSE 201
▰ Commodities – The commodities may be divided into two the Goods and Services.
▰ Production – The act of making goods and services
▰ Consumption – Act of using the goods and services to satisfy human wants THE MALTHUSIAN THEORY OF POPULATION
▰ The theory was proposed by Thomas Robert Malthus. The Malthusian Theory of Population is the theory of exponential population and arithmetic food supply growth. He believed that a balance between population growth and food supply can be established through preventive and positive checks.
Major Elements of the Malthusian Theory Population and Food Supply
▰ The population would double in 25 years at this rate. However, the food supply grows in an arithmetic progression. Food supply increases at a slower rate than the population. That is, the food supply will be limited in a few years. The shortage of food supply indicates an increasing population.
Checks on Population
▰ When the increasing population rate is greater than the food supply, disequilibrium exists. As a result, people will not get enough food even for survival. People will die due to lack of food supply. Adversities such as epidemics, wars, starvation, famines and other natural calamities will crop up which are named as positive checks by Malthus
Positive Checks
▰ Nature has its own ways of keeping a check on the increasing population. It brings the population level to the level of the available food supply. The positive checks include famines, earthquakes, flood,
epidemics, wars, etc. Nature plays up when the population growth goes out of hand.
Preventive Checks
▰ The preventive measures such as late marriage, self-control, simple living, help to balance the population growth and food supply. These measures not only check the population growth, but can also prevent the catastrophic effects of the positive checks
