Market Economy And Command Economy

Topics: Economic system, Market economy, Planned economy Pages: 8 (1599 words) Published: June 3, 2015
INTRODUCTION

This report focuses on two systems of economy, that is Market economy and Command economy. Basically there are four types of economy:

Traditional Economy:
As the word says, Traditional economy is an economic system in which traditions, customs and beliefs of the economy guides the production of goods and services. Command Economy
Command economy is a system in which government plays a major role in taking the production decision for goods and services in the economy. Market Economy
Under this system, goods and services are produced according to the market forces of demand and supply. Mixed Economy
Mixed economy is simply a combination of market economy and command economy wherein production takes place by determining demand and supply forces and government too interferes in economic activities for the betterment of the society.

MARKET ECONOMY

Market economy refers to an economic structure wherein investment, production and distribution decisions are based on market forces, that is demand and supply. Businesses and individuals are free to make their own decisions as they buy and sell in the market place. The main feature of the market economy is freedom to negotiate the cost of the commodities. There are four main participants in a market based economy, namely consumers, producers, owners of private property and government. However there is little to no government involvement when determining prices. Price is determined by the changes in demand and supply. A Producer will start producing more units of a product if there is an increase in demand for the product in the market. In market economy, the main motive of a producer is profit maximization and for a consumer it is to maximize their total satisfaction. However, no single consumer can affect the market price. Market economy operates same as a perfect competition market. In case of perfect competition, where there are large number of buyers and sellers, industry is the price maker and firm is the price taker.

Thus price cannot be affected by a single firm or consumer.
Market economies are generally found in countries that have a democratic form of government. There are many countries which operate market economy, some of which are Canada, US, Denmark, UK, Hong Kong, Germany and Mauritius.

COMMAND ECONOMY

Command economy, also known as planned economy is a system in which production decisions are made by the government. Plans are made by the officers, appointed by the government who determines what and how much of a good should be produced and at what price it should be made available to the consumers. Government directs resources and issue output targets to factories, due to which consumer choice is very restricted. There are three main actors in command economy, namely planners( government) , consumers and the workers. Planners study the economy and fix prices in such a way that it is affordable by all. But easily availability of a product leads to increase in consumption further leading to shortage of goods. Command economy works same as a monopoly model.

Under monopoly, there is a single seller of a good and he has command over the price. For example: Microsoft, in order to attract new customers may reduce the price of a new version of windows or make increase the price assuming itself to be the only seller of the product. Thus in this case the seller is the price maker. Similarly government may take any action suiting the conditions.

Thus a consumer cannot have any say in determining the price of a product.

The command economy is a key feature of any communist society. Soviet Union and former communist regimes of Eastern Europe are the major examples of command economies. Britain was very much a command economy during second world war. China, Cuba and North Korea also operate as a command economy.

MARKET VS COMMAND

Market economy and planned economy are two opposite models in...

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