Economic systems are the backbone of every country. They determine the way resources are allocated, goods and services produced, and how they are distributed. The two primary economic systems are the market economy and the command economy. In a market economy, the forces of demand and supply dictate the prices of goods and services, while in a command economy, the government controls the production and distribution of goods and services. In this article, we will discuss the complete difference between a market economy and a command economy. So let’s first have a look at a table comparing both market vs command economy.
Market and Command Economy (Comparison Chart)
| Market Economy | Command Economy |
|---|---|
| Market economy refers to the economic system in which the prices and distribution of goods and services are determined by the forces of supply and demand. | Command economy refers to the economic system in which the government controls the production, prices, and distribution of goods and services. |
| In a market economy, there is very minimal or no control of the government. | In a command economy, there is complete control of the government over the prices and distribution of goods and services. |
| The economic decisions in the market economy are made by individuals or firms. | In this type of economic system, the economic decisions are made by the government. |
| Incentives are provided by the profit motives to produce goods and services that are in demand. | In such type of economic system, the incentives are provided by the government through quotas, subsidies, and other forms of incentives. |
| In the market economy, consumer’s preference is taken into consideration. | In a command economy, consumer’s preference is not taken into consideration as the government controls the production, prices, and prices of goods and services. |
| The rate of financial and economic growth in the market economy is higher than in a command economy. | The rate of economic growth in the command economy is comparatively lower. |
| It is more flexible and can adapt to changing circumstances. | Command economies are inflexible and slowly respond to changing market conditions. |
| USA, UK, and Japan are examples of market economies. | East Germany, North Korea, and the Former Soviet Union are examples of command economies. |
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What is Market Economy?
A market economy is an economic system in which the production and distribution of goods and services are determined by the forces of supply and demand. In a market economy, individuals and firms are free to produce and consume goods and services as they, please. The price of goods and services is determined by the forces of supply and demand, and the government’s role is limited to regulating the economy and protecting consumers from market failures.
Example of Market Economy
The United States is an example of a market economy. The country’s economic system is characterized by free markets, private ownership of resources, and minimal government intervention in economic affairs. The United States has a diverse economy with a strong service sector and a thriving manufacturing sector. The country’s economic success is largely due to its market-oriented policies, which have encouraged entrepreneurship, innovation, and competition.
Advantages of Market Economy
The four most common advantages of the market economy are :
- Efficiency: In a market economy, prices are determined by supply and demand, which results in an efficient allocation of resources. Market forces encourage firms to produce goods and services that are in demand and to produce them efficiently.
- Innovation: Market economies encourage innovation and technological advancement. Firms are free to invest in research and development, and new ideas are rewarded with profits. This creates an environment that fosters innovation and leads to the development of new products and services.
- Consumer Choice: In a market economy, consumers have a wide range of choices when it comes to goods and services. This is because firms are competing with each other to offer the best products at the lowest prices. This competition ensures that consumers are getting the best possible products at the best possible prices.
- Flexibility: Market economies are flexible and can adapt quickly to changing circumstances. If demand for a particular product or service increases, firms can respond quickly by increasing production. If demand decreases, firms can quickly adjust production to avoid excess inventory.
What is Command Economy?
A command economy is an economic system in which the government controls the production and distribution of goods and services. In a command economy, the government decides what goods and services are produced, how much they cost, and how they are distributed. The government owns most of the resources and decides how they are allocated.
Examples of Command Economy
China and North Korea are examples of countries with a command economy. In China, the government controls most of the resources, and the economy is heavily regulated. The government determines what goods and services are produced, and there is limited private ownership of resources.
North Korea has a highly centralized command economy, where the government controls almost all aspects of the economy, including production, distribution, and pricing.
Advantages of Command Economy
The four advantages of a command economy are as follows.
- Centralized Control: In a command economy, the government has centralized control over economic decision-making. This allows for greater coordination of economic activities, which can lead to more efficient use of resources.
- Resource Allocation: In a command economy, the government can allocate resources to meet the needs of society. This can lead to the production of goods and services that are not profitable in a market economy but are essential to society.
- Equity: In a command economy, the government can ensure that everyone has access to basic goods and services, regardless of their ability to pay. This can promote greater equity in society.
- Stability: In a command economy, the government can ensure stability in the economy by controlling prices and production levels. This can prevent sudden fluctuations in the economy that can lead to inflation or recession.
Main differences
The primary difference between a market economy and a command economy is the degree of government control. In a market economy, the government has minimal control over the production and distribution of goods and services, while in a command economy, the government has complete control.
Another main difference is the way prices are determined. In a market economy, prices are determined by the forces of supply and demand, while in a command economy, prices are determined by the government.
Key Differences Between Market and Command Economy
While comparing market vs command economy, here we have included some of the key differences between them as well. They are as follows.
- Government Control: The primary difference between a market economy and a command economy is the degree of government control. In a market economy, the government has minimal control over the production and distribution of goods and services, while in a command economy, the government has complete control.
- Price Determination: In a market economy, prices are determined by the forces of supply and demand, while in a command economy, prices are determined by the government.
- Economic Decisions: In a market economy, individuals and firms have the freedom to make economic decisions, while in a command economy, the government makes all economic decisions.
- Incentives: In a market economy, individuals and firms are incentivized by profit motives to produce goods and services that are in demand, while in a command economy, incentives are provided by the government through quotas, subsidies, and other forms of incentives.
- Innovation: Market economies promote innovation as firms compete to create new products and services. On the other hand, command economies are less likely to promote innovation as the government controls all aspects of the economy.
The following table also shows the difference between the market and command economy in a brief way.
Conclusion
In conclusion, the market economy and the command economy are two different economic systems that have their advantages and disadvantages. A market economy is characterized by individual freedom, innovation, efficiency, and consumer choice. On the other hand, a command economy is characterized by centralized control, resource allocation, equity, and stability. The choice between these two economic systems depends on a country’s goals, values, and resources. Countries that prioritize individual freedom and innovation often choose a market economy. On the other hand, countries that prioritize centralized control and equity often choose a command economy.
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