Basic Microeconomics PDF - First Semester 2024-2025

Reference No: KLL-FO-ACAD-000 | Effectivity Date: August 3, 2020 | Revisions No.: 00 VISION MISSION A center of human de...

Reference No: KLL-FO-ACAD-000 | Effectivity Date: August 3, 2020 | Revisions No.: 00 VISION MISSION A center of human development committed to the pursuit of wisdom, truth, Establish and maintain an academic environment promoting the pursuit of justice, pride, dignity, and local/global competitiveness via a quality but excellence and the total development of its students as human beings, affordable education for all qualified clients. with fear of God and love of country and fellowmen. GOALS Kolehiyo ng Lungsod ng Lipa aims to: 1. foster the spiritual, intellectual, social, moral, and creative life of its client via affordable but quality tertiary education; 2. provide the clients with reach and substantial, relevant, wide range of academic disciplines, expose them to varied curricular and co-curricular experiences which nurture and enhance their personal dedications and commitments to social, moral, cultural, and economic transformations. 3. work with the government and the community and the pursuit of achieving national developmental goals; and 4. develop deserving and qualified clients with different skills of life existence and prepare them for local and global competitiveness MODULE FIRST Semester, AY 2024-205 MIDTERM MODULE 1 I. COURSE : BASIC MICROECONOMICS II. SUBJECT MATTER : INTRODUCTION TO ECONOMICS Specific Objectives: 1. Define basic economic terms; 2. Identify the elements involved in the objective of satisfying wants; 3. Differentiate economic analysis and economic policy; 4. Describe the methodology used in the scientific approach in studying economics; 5. Apply the use of economic models in economic analysis; 6. Present an overview of the circular flow in the economy; and 7. Differentiate the types of economic system. III. ENGAGEMENT: Read and understand. WHAT IS ECONOMICS? DEFINITION OF ECONOMICS Broadly, Economics -  Studies how prices of land, labor, and capital are determined, and how these prices are used to allocate scarce resources  Looks into the behavior of financial market and how it allocates capital to the rest of the economy Page 1 of 20 Marawoy, Lipa City, Batangas 4217 | https://www.facebook.com/KLLOfficial/   Looks into the distribution of income and into ways of helping the poor without causing harm to the country’s economic performance  Studies the impact on growth of government spending, taxes, and budget deficits  Examines the movements in income and employment during the different stages of the business cycle with the goal of developing government policies that will improve economic growth  Looks at trade patterns among nations and analyzes the impact of trade barriers  Examines growth in developing countries and suggests ways to encourage the efficient use of resources As defined by Parkin (2008) economics is the social science that studies the choices that individuals, businesses, governments, and entire societies make as they cope with scarcity and the incentives that influence and reconcile those choices. Dilts (2004) simplified economics as the study of the ALLOCATION of SCARCE resources to meet UNLIMITED human wants. According to an article posted by National Geographic, as one of the key concepts of economics, scarcity means that the demand for a good or service is greater than the availability of the good or service. Hence it can limit the choices available to the consumers who ultimately make up the economy, showing importance for understanding how goods and services are valued. It is further stated in the article that “things that are scarce, like gold, diamonds, or certain kinds of knowledge, are more valuable for being scarce because sellers of these goods and services can set higher prices. These sellers know that because more people want their good or service than there are goods and services available, they can find buyers at a higher cost.” The subject of Economics divides into two main parts: Microeconomics is study of the choices that individuals and businesses make, the way these choices interact in markets, and the influence of governments. Macroeconomics is the study of the performance of the national economy and the global economy. Page 2 of 20 Marawoy, Lipa City, Batangas 4217 | https://www.facebook.com/KLLOfficial/ ECONOMIC ACTIVITY Man’s Basic Economic Activity According to Pagoso, et al, as a basic activity, a man exerts efforts to satisfy his human wants with the use of goods and services. They mentioned three elements involved in this objective of satisfaction: Human Wants Human wants are unlimited and vary from the needs for survival, otherwise known as basic needs (e.g. food, clothing, and shelter) to higher needs for a comfortable life. In addition, man is subject to create wants, develop them due to the effects of consumption as dictated by our culture. Use of Resources The basic economic resources of a nation consist of land, labor, capital and entrepreneurship. These items are available in limited amounts, thus man has to learn to allocate them properly in order to maximize the number of wants that can be satisfied. There are factors of production that determine how goods and services are valued to satisfy human wants. Land is said to be the gift of nature that we use to produce goods and services. In economics, land is classified as natural resources, and it includes land in the everyday sense together with metal ores, oil, gas and coal, water, and air. According to Parkin, the land surface and water resources are renewable and some of the mineral resources can be recycled, except the resources used to create energy, which can only be used once. Labor is the work time and work effort that people expend to produce goods and services. It includes the physical ad mental efforts of all the people who work on farms, and construction sites and in factories, shops and offices. As for Parkin, the quality of labor depends on human capital, which is the knowledge and skill that people obtain from education, on-the-job training, and work experience. Page 3 of 20 Marawoy, Lipa City, Batangas 4217 | https://www.facebook.com/KLLOfficial/  Capital are tools, instruments, machines, building, and other constructions that businesses use to produce goods and services. Money, stocks, and bonds are financial capital which plays an important role in enabling businesses to borrow the funds that they use to buy capital. Financial capital is not used to produce goods and services and if it is not a productive resource, it is not capital. Entrepreneurship involves the human resource that organizes labor, land and capital. It comes from the ideas about what and how to produce, make business decisions and bear the risks that arise from these decisions. Technique of Production It shows how resources are used and combined in production. Production is described as capital-intensive or labor-intensive depending on what factor is predominantly used. In effect, according to Pagoso, et al, the basic activities of man also constitute the basic exchange that takes place between the business firm and the consumers. Resources Payment Land Rent Labor Wage/Salary Capital Interest Entrepreneurship Profit CONSUMPTION As Pagoso, et al puts it, the household is the basic consuming unit in the economy. Human wants are unlimited; humans maximize their satisfaction through the proper allocation or mix of expenditures within the context of budget limitations. The decision to buy a new T-shirt means giving up some snacks at school as the satisfaction that will be gained from the former will outweigh the satisfaction foregone from the latter. The opportunity foregone is called opportunity cost, which is the Page 4 of 20 Marawoy, Lipa City, Batangas 4217 | https://www.facebook.com/KLLOfficial/ value of a foregone alternative of a specific resource. Opportunity cost may be exemplified in the earning value of a university ground had it been used as a commercial center instead of an educational institution. Some Economic Problems  Unemployment;  Economic instability that causes highs and lows in production and investment levels;  Low levels of growth and development which make them more difficult for underdeveloped and developing nations to rise from their low levels of income and employment;  Inequality in income distribution resulting in the concentration of the nation’s wealth in the hands of a few; and  Determination of the type of economic system to be adopted to meet the country’s peculiar conditions and needs. Economic Analysis Economic Analysis according to Pagoso et al is the process of directing economic relationships by examining economic behavior and events and determining the causal relationships among the data and activities observed. Purposes of Economic Analysis  Economic analysis is an aid in understanding how economy operates because it explains how economic variables are related to each other.  It permits prediction of the results of changes in the economic variables.  It serves as a basis for just policy formulation. Economic Policy Economic Policy consists of intervention or courses of action taken by the government or other private institutions to manipulate the results of economic activity. Page 5 of 20 Marawoy, Lipa City, Batangas 4217 | https://www.facebook.com/KLLOfficial/ The economic policy adopted by the government may be monetary, fiscal, or trade for the purpose of achieving economic welfare. Steps in formulating policy (Dilts, 2004): 1. Stating goals - must be measurable with specific stated objectives to be accomplished. 2. Identifying options - identify the various actions that will accomplish the stated goals & select one; and 3. Evaluating - gathers and analyzes evidence to determine whether policy was effective in accomplishing goal, if not re-examine options and select option most likely to be effective. Methodology To make a useful, systematic study of economic activity, one must use economic theory. Economic Theory like the theory of any other science, consists of sets of principles or casual relationships among the important facts or variables that surround and permeate economic activity. The Construction of Economic Theory 1. Specification and definition of its postulates 2. Observation of facts concerning the activity about which we want to theorize 3. The application of the rules of logic to the observed facts in an attempt to establish causal relationship among them and to eliminate as many irrelevant and insignificant facts as possible. 4. Process of establishing a set of principles is a crucial one. Once hypotheses have been formulated, they must b thoroughly tested to determine the extent of which they are valid, that is, the extent to which they yield good explanations and predictions. The Functions of Economic Theory 1. to explain the nature of economic activity 2. to predict what will happen to the economy as facts change Page 6 of 20 Marawoy, Lipa City, Batangas 4217 | https://www.facebook.com/KLLOfficial/ PRICE THEORY AND ECONOMIC THEORY Characteristics of Microeconomics 1. Looks at the decisions of individual units, focuses on choices made by individual decision units such as households, producers, ad firms. 2. (Price Theory) Looks at how prices are determined in various types of market structures such as pure competition, monopoly, monopolistic competition, and oligopoly. 3. (Social Welfare) Examines the efficiency, relative desirability, and choice of alternative methods by which resources are utilized to alleviate scarcity. (welfare economics) 4. Microeconomics has a limited focus. 5. Microeconomics develops skills. Useful and marketable skills developed by microeconomics: a) Helps develop logical reasoning b) Helps develop skill in construction an use of models. c) Employs optimizing techniques that are useful for making decisions in a variety of situations. d) Applicable to personal resource allocation decisions, such as career choices or financial investments Economic Models The MODERN ECONOMY is a complex machine. Its job is to allocate limited resources and distribute output among a large number of agents—mainly individuals, firms, and governments—allowing for the possibility that each agent’s action can directly (or indirectly) affect other agents’ actions. Adam Smith labeled the machine the “invisible hand.” In The Wealth of Nations, published in 1776, Smith, widely considered the father of economics, emphasized the economy’s self-regulating nature—that agents independently seeking their own gain may produce the best overall result for society as well. Today’s economists build models—road maps of reality, if you will—to enhance our understanding of the invisible hand. Page 7 of 20 Marawoy, Lipa City, Batangas 4217 | https://www.facebook.com/KLLOfficial/  As economies allocate goods and services, they emit measurable signals that suggest there is order driving the complexity. For example, the annual output of advanced economies oscillates around an upward trend. There also seems to be a negative relationship between inflation and the rate of unemployment in the short term. At the other extreme, equity prices seem to be stubbornly unpredictable. Economists call such empirical regularities “stylized facts.” Given the complexity of the economy, each stylized fact is a pleasant surprise that invites a formal explanation. Learning more about the process that generates these stylized facts should help economists and policymakers understand the inner workings of the economy. They may then be able to use this knowledge to nudge the economy toward a more desired outcome (for example, avoiding a global financial crisis). Interpreting reality An economic model is a simplified description of reality, designed to yield hypotheses about economic behavior that can be tested. An important feature of an economic model is that it is necessarily subjective in design because there are no objective measures of economic outcomes. Different economists will make different judgments about what is needed to explain their interpretations of reality. There are two broad classes of economic models— theoretical and empirical. Theoretical models seek to derive verifiable implications about economic behavior under the assumption that agents maximize specific objectives subject to constraints that are well defined in the model (for example, an agent’s budget). They provide qualitative answers to specific questions—such as the implications of asymmetric information (when one side to a transaction knows more than the other) or how best to handle market failures. In contrast, empirical models aim to verify the qualitative predictions of theoretical models and convert these predictions to precise, numerical outcomes. For example, a theoretical model of an agent’s consumption behavior would generally suggest a positive relationship between expenditure and income. The empirical adaptation of the theoretical model would attempt to assign a numerical value to the average amount expenditure increases when income increases. Page 8 of 20 Marawoy, Lipa City, Batangas 4217 | https://www.facebook.com/KLLOfficial/  Economic models generally consist of a set of mathematical equations that describe a theory of economic behavior. The aim of model builders is to include enough equations to provide useful clues about how rational agents behave or how an economy works (see box). The structure of the equations reflects the model builder’s attempt to simplify reality—for example, by assuming an infinite number of competitors and market participants with perfect foresight. Economic models can be quite simple in practice: the demand for apples, for example, is inversely related to price if all other influences remain constant. The less expensive the apples, the more are demanded. Or models can be rather complex: some models that seek to predict the real level of output of an economy use thousands of complex formulations that go by such names as “nonlinear, interconnected differential equations.” Economic models can also be classified in terms of the regularities they are designed to explain or the questions they seek to answer. For example, some models explain the economy’s ups and downs around an evolving long-run path, focusing on the demand for goods and services without being too exact about the sources of growth in the long run. Other models are designed to focus on structural issues, such as the impact of trade reforms on long-term production levels, ignoring short-term oscillations. Economists also build models to study “what-if ” scenarios, such as the impact on the overall economy of introducing a value-added tax. How economists build empirical models Despite their diversity, empirical economic models have features in common. Each will allow for inputs, or exogenous variables, which do not need to be explained by the model. These include policy variables, such as government spending and tax rates, or non-policy variables, like the weather. Then there are the outputs, called dependent variables (for example, the inflation rate), which the model will seek to explain when some or all of the exogenous variables come into play. Every empirical model will also have coefficients that determine how a dependent variable changes when an input changes (for example, the responsiveness of household consumption to a $100 decrease in income tax). Such coefficients are usually estimated (assigned numbers) based on historical data. Last, empirical model Page 9 of 20 Marawoy, Lipa City, Batangas 4217 | https://www.facebook.com/KLLOfficial/ builders add a catchall variable to each behavioral equation to account for idiosyncrasies of economic behavior at the individual level. (In the example above, agents will not respond identically to a $100 tax rebate.) There are, however, fundamental differences among economists regarding how an empirical model’s equations should be derived. Some economists insist that the equations must assume maximizing behavior (for example, an agent chooses its future consumption to maximize its level of satisfaction subject to its budget), efficient markets, and forward-looking behavior. Agents’ expectations and how they react to policy changes play a vital role in the resulting equations. Consequently, users of the model should be able to track the effect of specific policy changes without having to worry about whether the change itself alters agents’ behavior. Other economists favor a more nuanced approach. Their preferred equations reflect, in part, what their own experience has taught them about observed data. Economists that build models this way are, in essence, questioning the realism of the behavioral constructs in the more formally derived models. Incorporating experience, however, often means it’s impossible to untangle the effect of specific shocks or predict the impact of a policy change because the underlying equations do not explicitly account for changes in agent behavior. The gain, these same economists would argue, is that they do a better job of prediction (especially for the near term). What makes a good economic model? Irrespective of the approach, the scientific method (lots of sciences, such as physics and meteorology, create models) requires that every model yield precise and verifiable implications about the economic phenomena it is trying to explain. Formal evaluation involves testing the model’s key implications and assessing its ability to reproduce stylized facts. Economists use many tools to test their models, including case studies, lab-based experimental studies, and statistics. Still, the randomness of economic data often gets in the way, so economists must be precise when saying that a model “successfully explains” something. From a forecasting perspective that means errors are unpredictable and irrelevant (zero) on average. When two or more models satisfy this condition, economists generally use Page 10 of 20 Marawoy, Lipa City, Batangas 4217 | https://www.facebook.com/KLLOfficial/ the volatility of the forecast errors to break the tie—smaller volatility is generally preferred. An objective signal that an empirical model needs to be revised is if it produces systematic forecasting errors. Systematic errors imply that one or more equations of the model are incorrect. Understanding why such errors arise is an important part of the regular assessment economists make of models. Why models fail All economic models, no matter how complicated, are subjective approximations of reality designed to explain observed phenomena. It follows that the model’s predictions must be tempered by the randomness of the underlying data it seeks to explain and by the validity of the theories used to derive its equations. A good example is the ongoing debate over existing models’ failure to predict or untangle the reasons for the recent global financial crisis. Insufficient attention to the links between overall demand, wealth, and—in particular—excessive financial risk taking has been blamed. In the next few years there will be considerable research into uncovering and understanding the lessons from the crisis. This research will add new behavioral equations to current economic models. It will also entail modifying existing equations (for example, those that deal with household saving behavior) to link them to the new equations modeling the financial sector. The true test of the enhanced model will be its ability to consistently flag levels of financial risk that require a preemptive policy response. No economic model can be a perfect description of reality. But the very process of constructing, testing, and revising models forces economists and policymakers to tighten their views about how an economy works. This in turn promotes scientific debate over what drives economic behavior and what should (or should not) be done to deal with market failures. Adam Smith would probably approve. AN OVERVIEW OF THE ECONOMY The Circular Flow of Economic Activity Page 11 of 20 Marawoy, Lipa City, Batangas 4217 | https://www.facebook.com/KLLOfficial/  Within the economy, the basic activities of production, consumption, employment, and income generation take place through the interrelationship existing between the basic consuming unit, which is the household, and the basic producing unit, which is the firm. Figure 1.1. Circular Flow Model. Households and firms interact in two markets. By Fanshawe College, CC-BY-NC-SA 4.0 It pictures the economy as consisting of two groups—households and firms— that interact in two markets: the goods and services market in which firms sell and Page 12 of 20 Marawoy, Lipa City, Batangas 4217 | https://www.facebook.com/KLLOfficial/ households buy and the labour market in which households sell labour to business firms or other employees. Clockwise arrows show Firms produce and sell goods and services to households in the market for goods and services (or product market). Households provide the labour and other resources (e.g. land, capital, raw materials) firms need to produce goods and services in the market for inputs (or factors of production). Next, households pay for goods and services, which becomes the revenues to firms. This is the anticlockwise arrow going from firms to households. The anti clockwise arrows indicate the payments: firms pay for the inputs (or resources) they use in the form of wages and other factor payments. And households earn income from these payments that allow them to pay for the goods and services they produce. There are many different markets for goods and services and markets for many different types of labour. The circular flow diagram simplifies this to make the picture easier to grasp. In the diagram, firms produce goods and services, which they sell to households in return for revenues. The outer circle shows this, and represents the two sides of the product market (for example, the market for goods and services) in which households demand and firms supply. Households sell their labour as workers to firms in return for wages, salaries, and benefits. The inner circle shows this and represents the two sides of the labour market in which households supply and firms demand. This version of the circular flow model is stripped down to the essentials, but it has enough features to explain how the product and labour markets work in the economy. We could easily add details to this basic model if we wanted to introduce more real-world elements, like financial markets, governments, and interactions with the rest of the globe (imports and exports). Basic Economic Problem All nations, big and small, developed and underdeveloped, have to find answers to the following economic problems: 1. What to produce? (Type of goods society desires) 2. How much to produce? (Quantity) Page 13 of 20 Marawoy, Lipa City, Batangas 4217 | https://www.facebook.com/KLLOfficial/ 3. How to produce? (Technique of production, and the manner of combining resources) 4. For whom to produce? (market to which the producers will sell their products) TYPES OF ECONOMIC SYSTEM In his article, Dr. R. Nalini from Pandhicherry University writes that an economy is an organization through which citizens make their livelihood. To deal with its internal problems, every economy has certain norms and rules of conduct, called institutions. Resources, industries, kin, money, etc. are examples of economic institutions. Economic system is a pattern of co-operation among associates of an economy with its specific institutions. It comprises the institutions that direct an economy. Ownership of means of production also determines the form of economic system of a nation. This would mean private, government or joint ownership of the means of production. A state makes a conscious choice of wants to be fulfilled in the face of its scarce resources. The economic activities of production, consumption, distribution and exchange together with the institutions follow a set arrangement to reach their economic goals. These arrangements evolve into economic systems. Features of an Economic System  Orderly institutional arrangement  Man-made phenomenon  Evolutionary, dynamic and flexible Types of Economic Systems Capitalism The ownership of means of production lies in the hands of private individuals and institutions. It is wholly market based and profit is the guiding principle of all economic activities, regulated by the forces of demand and supply – that whatever is in demand will be produced since it yields high profits. The consumer is the supreme factor around Page 14 of 20 Marawoy, Lipa City, Batangas 4217 | https://www.facebook.com/KLLOfficial/ whose choices the goods and services are based. It is also called a ‘Free Market Economy’ since all citizens have the legal freedom to opt for any occupation or agreement. In the words of R.T. Byte “Capitalistic economy may be defined as that system of economic organization in which free enterprise, competition and the private ownership of property generally prevail”. Main Features of Capitalism Price mechanism: In the absence of external interference, the prices in a capitalist economy are determined in accordance with the movement patterns of demand and supply. The production decisions of quality, quantity and place of produce are decided in tune with the price mechanism. Freedom of enterprise: The citizens are free to choose the occupation or profession based on his capability and liking. They can use their means of production as per their preferences. Competition: The number of competitors is high because of the presence of market economy and price mechanism. Moreover, individuals can choose ways of using their means of production and with no restrictions on the profit motive. Profit orientation: All the economic activities are profit driven. Sovereignty of the consumer: Customer is king’ principle prevails in a capitalist economy. Since the consumer, through his choices, decides on the demand and supply in the market, his satisfaction is given the utmost care. Labour as a commodity: Labour is available in the market for a price called wages from people with inadequate means of production who are unable to utilize their own labour. No government interference: The role of the government is protecting its citizens from foreign invasion, acts of terrorism and ensuring law and order in the state. It does not interfere in the economic activities. Page 15 of 20 Marawoy, Lipa City, Batangas 4217 | https://www.facebook.com/KLLOfficial/ Merits of Capitalism  Economic freedom Equal right to work  Right to accrue wealth  Rich choice of goods and services  Encouragement to success and hard work Consumer as prime focus  Quality production Demerits of Capitalism  Disproportionate sharing of wealth  Neglect of public welfare  Risk of cyclical fluctuations Ruthless competition  Discord between the haves and have-nots.  Consumer sovereignty becomes a myth as most of the consumption choices are directed by advertisement and sales propaganda. Socialism Presently, there is no nation in the world that can be termed a truly socialist economy. After the great fall of the Soviet Union that claimed itself to be the antithesis of capitalist America, doubts about socialist economy have been abound. Even China has started adopting such economic measures that cannot be categorized as a socialist economy. Nevertheless, in socialism the economic system is administered and regulated by the government. The objective is to secure welfare and equality of the society. Main Features Social or collective ownership: All means of production are socially owned and utilized by the government. No individual ownership in any form is encouraged. However, an individual can hold private property as is necessary for his subsistence. Central planning authority: Based on a survey of available resources (human and physical), a central planning authority established by the government Social Work Page 16 of 20 Marawoy, Lipa City, Batangas 4217 | https://www.facebook.com/KLLOfficial/ Intervention with Individuals and Groups decides on economic issues. Accordingly, an exhaustive plan is made in pursuit of the predetermined goals. The planning authority prepares plans for the economy as a whole. Government control: It is present in all the economic activities and also in the central planning. Plans of the central planning authority are carried out only with the approval of the government. Social welfare: Driven by the noble pursuit of securing social welfare of all its citizens, the government at times carries out such economic activities that may not be profitable. This is done to realize the dream of ‘well-being of one and all.’ Merits of Socialism  Optimum usage of economic resources  Better way out to basic problems  Lesser cyclical fluctuations  Rapid, balanced economic development Equitable distribution of income  Better equipped to face economic crisis Demerits No proper basis of cost calculation: The severest of criticism of this system is that it is difficult to find out the basis of calculating cost under it. Without this basis neither the economy can function efficiently nor can the resources be utilized in a proper manner. Curtain of concealment: Quoting the example of Soviet Union of Russia as a socialist economy, we recall the usage of the term ‘iron curtain’ to describe the country. All activities and outcomes of economic activities were kept guarded until one day everything crumpled like a pack of cards.  End of consumer’s sovereignty  No importance to personal efficiency and productivity  Difficulties in the right implementation of the plan  Lack of freedom Page 17 of 20 Marawoy, Lipa City, Batangas 4217 | https://www.facebook.com/KLLOfficial/  Lack of motivation for work Mixed Economic System In India, after independence, while making the choice of an economic system, the Jawaharlal Nehru led nation decided on blending capitalism and socialism. Known as ‘mixed economy’ and rightly so, it aims to include the best of the other two systems. It is characterized by the joint operation of the private and public sectors and allocation of economic resources are done accordingly. In the words of Anatol Murad, “Mixed economy is that economy in which both government and private individuals exercise economic control”. Main Features Partnership of the private and public sectors: The public sector strives for the betterment of the interests of the common man, works towards more equitable distribution of income and promotes its ideals of a welfare state. The private sector too is given a specific responsibility. Planned economy and government control: Focusing on economic development, periodical plans for the nation are made by the Government to be adhered to by both the sectors. To reach the set destination and uphold social welfare, the private sector is regulated and controlled by the government. Private property and economic equality: Having permitted right to private property, the government through a well-planned mix of laws, taxes and welfare programs ensures fair distribution of income and wealth. Price mechanism and regulated economy: While the prices of some essential commodities such as domestic fuel, railway fares, postal charges, etc., are in the hands of the public sector, the price mechanism also exists. Profit motive and social welfare: It is again a combination of objectives of capitalist and socialist economies. However, if the Government is of the opinion that any private sector industry is hampering the progress of the society, nationalization is resorted to. Page 18 of 20 Marawoy, Lipa City, Batangas 4217 | https://www.facebook.com/KLLOfficial/ Merits  Economic freedom and capital formulation  Competition and efficient production  Efficient allocation of resources  Advantages of planning  Economic equality  Freedom from exploitation Demerits Unstable economy: The current trend in India shows a strong shift to capitalist economy. Some decades ago the focus was socialist economy. Based on the strength at a given time, one sector dominates the other thereby tilting towards one economic system. This may destabilize the mixed economy in the long run. Constrained growth: Just as riding on two horses, in a mixed economy neither the private sector is allowed to operate freely nor does the public sector function to its optimum efficiency. This prevents desired growth in both the sectors.  Lack of efficiency  Corruption SUMMARY Pagoso, et al wrote that Economics deals with how prices of land, labor, and capital are determined, and how these prices are used to allocate scarce resources. Page 19 of 20 Marawoy, Lipa City, Batangas 4217 | https://www.facebook.com/KLLOfficial/ REFERENCES: Circular Flow of microeconomics. Retrieved from https://ecampusontario.pressbooks.pub/principlesofmicroeconomicscdn/ chapter/2-2- circular-flow-model/) Ouliaris, Sam (2011) Back to Basics, What are economic models? How economists try to simulate reality. Finance and Development. Retrieved from https://www.imf.org/external/pubs/ft/fandd/2011/06/pdf/basics.pdf Nalini, R. (n.d) Concepts and types of economic system, retrieved from https://egyankosh.ac.in/bitstream/123456789/84630/1/Unit-3.pdf Pagoso, C.M, et al (2015).Introductory microeconomics.Fourth Edition.Rex Bookstore Parkin, M. (2008) Microeconomics, Eighth Edition. Pearson Addison Wesley Page 20 of 20 Marawoy, Lipa City, Batangas 4217 | https://www.facebook.com/KLLOfficial/