Economic Systems: Command, Market, and Mixed Show
The way in which a society answers the three fundamental economic questions is called an economic system. More formally, an economics system is a process or mechanism for answering the three fundamental questions. We can classify any type of economic system by two characteristics: who owns the resources? And who answers the fundamental questions? There are three main types of economic systems: command, market, and mixed. We will briefly describe each of these three types. Command Economy In a command economy, what goods and services are produced, how they are produced, and for whom they are produced are all questions answered by government planning. The government makes economic decisions for the good of society. In a pure command economy, all resources are owned by the government, so the government can direct them to produce what is best for society as a whole, rather than what might be in the interests of private individuals. So government owned the land, government owned the businesses, and government even told people what their occupations would be. Historically, command economies were associated with a political system known as communism, where the goals of society as a whole were given priority over individual goals. The Soviet Union until its breakup in the late 1980s was an excellent example of a command economy. Cuba and North Korea are good examples in today�s world of command economies. One of the biggest changes in the world in the last 15-20 years has been the fall of communism and command economies. The number of command economies in the world has fallen dramatically in the last decade. While the theoretical objective of a command economy is to use economic resources for the good of the whole society, as a practical matter command economies didn�t do that very well. In a command economy, government-owned producers are not allowed to go out of business, so they had little incentive to produce quality products at low cost. Since private individuals could not own means of production, they had no incentive to search for better ways of serving consumers� wants and desires. Rather than growing and prospering, command economies typically were stagnant. Market Economy In a market economy, resources are owned by private individuals. The goods and services that are produced are not determined by the government. Rather, production is determined by businesses responding to the wants and desires of consumers. (This process occurs through the interaction of demand and supply, about which we will have much more to say starting next week.) Consumers determine what will be produced. (You might have heard the expression �consumer sovereignty,� which suggests that in a market economy, consumers are king.) Adam Smith is often regarded as the first economist. In his famous book published in 1776, An Inquiry into the Nature and Causes of the Wealth of Nations (often referred to simply as The Wealth of Nations), Smith described the advantages of a market economy. Smith said that a market economy is controlled as if by an invisible hand � producers produce the things that consumers want without government telling them what to do. The invisible hand expression suggests that if the economy allows people to pursue their own individual interests, the result will be the best for society as a whole. Producers who want to make as much profit as they can will have to produce the things that consumers want. Profit thus is an incentive for producers to satisfy consumers wants and desires. Critics of a market economy argue that while it might do a good job of answering the first two fundamental questions (What to produce, How to produce), it does not do so well answering the third question (For whom to produce). Critics argues that producers satisfy the wants and desires of consumers who have the money to express those wants and desires, while those people without money are not served. In a market economy, critics say, there may be a wide gap between rich and poor. Mixed Economy A mixed economy is a blend of market and command economies. In a mixed economy some parts or sectors of the economy are left to private ownership (market) while in other sectors there is substantial government ownership or government-directed production (command). In a mixed economy, government intervenes in those sectors where private ownership is believed to be not in the best interests of society as a whole. For example, in a mixed economy the government might control the production and distribution of health care (as in Great Britain and Sweden). Mixed economies are relatively common in Western Europe, in countries such as France, Sweden, and Italy. Key Takeaways
How a Market Economy WorksIn a market economy, private individuals, companies, and corporations own most of the resources. Individuals make decisions that contribute to supply and demand, which set prices and direct the production and use of goods and services. The concept of private property is central to the market economy, because it gives owners the right to sell their goods. Competition is also an important factor, because it affects supply and demand. In contrast to a market economy, in a command economy, a central government (or even a single ruler) decides how many goods should be produced and services provided, and sets their prices. Market economies are not controlled by a central authority such as a government, and are instead based on voluntary exchange. Market economies are a type of capitalism—an economic system in which private entities or people own the means of production. Conversely, command economies are tied to socialism and communism, where the collective group owns the means of production. Examples of a Market EconomyToday, very few national economies are “pure” market economies or command economies. Most countries, including the U.S., have a mixed economy with elements of both market and command economies. NoteIn the U.S., some people believe the market economy is largely self-regulating. Others argue that the government should take a more active role in regulating companies and markets. Today, some sectors of the U.S. economy are highly regulated and directed by the government, and others operate with less government intervention. Because of this, the distinction between whether a country has a command economy or a market economy is less clear-cut. Economists today distinguish between many different types of market economies, based on how much a government intervenes in markets. In liberal market economies, for example, the competitive market is prevalent, as seen in the U.S. and the U.K. Coordinated market economies, on the other hand, exchange private information through non–market institutions such as unions and business associations. Germany and Japan use this model. Characteristics of a Market EconomyA well-functioning market economy relies on a number of economic institutions, rights, freedoms, and conventions. Private OwnershipIn a market economy, most goods and services are privately owned. Owners can profit by selling or leasing property, products, or services. Freedom of ChoiceOwners are free to produce, sell, and purchase goods and services in a competitive market. They do have two factors that are somewhat outside of their control. First, a buyer must be willing to pay the price they set for their goods or services. Second, the amount of capital they have is determined by the costs to produce and sell their goods and the price they can sell them. Motive of Self-InterestSelf-interest is one of the primary factors behind a successful market economy. Most businesses have been created for the best interests of the people that started them. A market economy provides opportunity, gives people a chance to work for themselves, and lets them try to earn a living in a way that they want to. NoteIn a market economy, sellers aim to sell to the highest bidder while negotiating the lowest price for their purchases. Although their motives are for their own self-interest, this benefits the overall economy over the long run. It creates a system that sets prices that reflect an accurate picture of supply and demand at any given moment. CompetitionThe force of competitive pressure keeps prices low. It also ensures that society provides goods and services more efficiently. As soon as demand increases for a particular item, prices rise thanks to the law of demand. Competitors see they can enhance their profit by producing the same item, adding to supply. That lowers prices to a level where only the best competitors remain. Competitive pressure also applies to workers and consumers. Employees vie with one another for the highest-paying jobs, and buyers compete for the best product at the lowest price. A System of Markets and PricesA market economy relies on an efficient market in which to sell goods and services. A market is said to be efficient when all buyers and sellers have equal access to the same information about prices, supply, and demand. As a result, price changes are pure reflections of the laws of supply and demand. Limited GovernmentEven in a market economy, the government plays a role. It ensures that the markets are open, working, stable, fair, and safe. For example, many governments create regulatory agencies to ensure that products are safe for use and consumption, and that businesses are not taking advantage of consumers. NoteGovernment regulations can also work to ensure that everyone has equal access to the markets and information, and that it is free of manipulation. The government can penalize companies that command too dominant a share in the market, known as a monopoly. Alternatives to a Market EconomyAlthough most countries today have some form of market economy, this hasn’t always been the case, and there are a number of alternatives to this economic model. The economies of medieval Europe were feudal, for example, and anthropologists have discovered many different economic models among indigenous groups. For most of the last century, however, market economies have been understood in contrast to command economies. Cuba, North Korea, and the former Soviet Union all have or had command economies. China maintained a command economy until 1978, when it began its transition to a mixed economy that blends communist and capitalist elements. No economy today, except at the smallest scale, is a “pure” market economy. Almost all markets are regulated to some degree. This is because free markets can flourish only when governments protect individuals’ rights and support markets with proper infrastructure. A related concern is inequality. Recent studies have found that in contemporary market
economies, the rate of return on investment frequently outstrips average growth across a society. Left unchecked, this phenomenon means the wealth held by owners of capital increases far more rapidly than other kinds of earnings (wages, for example). This process creates then deepens inequality. Pros and Cons of a Market EconomyPros
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Frequently Asked Questions (FAQs)What are the characteristics of a free market economy?The main characteristic of a market economy is that individuals own most of the land, labor, and capital. In other economic structures, the government or rulers own the resources. What countries have a market economy?Most countries have mixed economies with elements of a market economy. The United States, The United Kingdom, Japan, and Germany all are examples that have elements of a market economy. Singapore is the country that is the closest to having strictly a market economy. Are individuals who purchase products to satisfy their needs and wants?Consumers are people who buy or use goods and services to satisfy their wants.
Who determines what to produce in a market economy?In a market economy, the producer gets to decide what to produce, how much to produce, what to charge customers for those goods, and what to pay employees. These decisions in a free-market economy are influenced by the pressures of competition, supply, and demand.
Which of the following is true about a market economy?Which of the following is true about market economies? Market economies are more efficient than centrally-planned economies.
What is the organized way a nation provides for the needs and wants of its people?The economy or economic system is an organized way of providing for the wants and needs of their people.
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