The economic system of functionality and existence is very important in the Economy. It takes care of how and when to produce the goods, types of goods to be produced, and who produces the goods. Government law, rights of consumers, and producers will also be considered by the economic system.
The economic system includes the market economy, command economy and mixed economy. The important decision will be taken by the government or individual of supply of goods, pricing of goods and so on.
Market Economy vs Command Economy
The main difference between the market economy and command economy is that market economy is an economic system managed by individuals or businesses and economic decisions are taken by them. While the command economy is a system where the economic decisions are taken by the government.
The market economy is one of the economic systems where the economic decision is taken by individuals or private sectors such as the price of goods, the supply of goods. The goods and services produced will be managed by the law of supply and demand.
The command economy is another economic system where the economic decision will be taken by the government as what and how to produce goods. It will not depend on the law of supply and demand as the market economy does.
Comparison Table Between Market Economy and Command Economy (in Tabular Form)
| Parameter of Comparison | Market economy | Command economy |
|---|---|---|
| Ownership | The economic decisions are managed by buyer and sellers based on supply and demand | The overall economic decision controlled by the government |
| Preferences | In the market economy, the goods will be supplied considering consumer preferences | Consumer preference will not be considered. |
| Innovation | It encourages the development and innovation of individuals. | It does not encourage development and innovation. |
| Business Ethics | It has poor business ethics as more focus on market competition which may lead to unemployment | The government manages the mode of business and reduces unemployment and other unhealthy practices |
| Objectives | It more focuses on profit | It focuses on macroeconomics and social objectives |
What is Market Economy?
The market economy is one of the economic systems where the economic decision are taken by individual businesses or private sectors on many factors involving the goods. The economic law of supply and demand plays a vital role in taking economic decisions.
The buyer and seller will decide the price of goods, at times negotiation also happens. In this system, they sell the goods at a maximum price which is considered the highest reasonable price to make the consumers buy the goods.
The market economy works on the theory of supply and demand. Here land, capital, goods, and labour are owned by individuals or businesses. Considering the consumer preference the goods and services will be supplied. When demand is high the market economy produces goods at the maximum price that consumers can buy and earns more profit.
The advantages of the Market economy are
- Most of the property or goods and services are own, they can decide on buying and selling price keeping the profit as their priority. They have full freedom on the sale, purchase, or produce in the market.
- It more focuses on consumer preferences. if goods are produced as per consumer preferences, the goods can be priced at the maximum price that consumers can buy. The market economy gives more importance and rewards to efficient producers as they produce goods and services and earn the profit.
The disadvantages of Market economy are
- In the market economy, the individuals or businesses own the property or goods and services, the pricing of goods may be very high keeping the profit as their priority.
- Producing goods and services as per consumer preference is competition, they may think the future aspects and may also practice unhealthy business. It may lead to unemployment and layoffs.
The market economy is the economic system that is more focused on technology and consumer demand.
What is Command Economy?
The command economy is another economic system where the decision lies in the hands of the government of a nation. Law of supply and demand does not play any role in this system.
In the command economy system, there is an involvement of the political system too. The decision to mass-produce products without considering the preference of the consumer. Here the goods and services they produce can be outdated and the price will be decided by the government keeping in mind that everyone can afford to buy it in the country.
Command economy more focused on macroeconomics and social objectives than making a profit. It controls the price and compares to the market economy it gives fewer incentives to its efficient producers. The profit will be undertaken by the government.
The advantages of Command economy are
- The command economy avoids inequality by controlling the price and gives importance to social welfare than making the profit.
- It avoids or reduces unhealthy business practices
- It prevents mass layoffs or unemployment.
- It also helps government firms to overcome market failure.
- In the command economy, the production runs on a plan made by the government.
- It maximum makes use of national capital and natural resources.
- It makes use of every individual’s skill.
- The main goal to produce the basic requirements of the people in the country.
The disadvantages of Command economy are
- In the command economy, government firms will have very less information about the goods and services that consumers want.
- Here they do not give considered the consumer preferences or want
- There will be no encouragement of individuals ideas or thoughts
- It runs as per government plan.
In the command economy, the government holds the power on decision making and controls monopoly power.
Main Differences Between Market Economy and Command Economy
- The main difference between the market economy and command economy is the ownership and decision making aspects. The market economy is owned by private individuals and the decisions are made by them whereas Command economy is owned by the government of the nation who also takes decisions concerning it.
- In the market economy, the goods will be supplied considering consumer preferences. While in the Command economy consumer preference will not be considered.
- The market economy encourages the development and innovation of individuals and the command economy does not encourage or gives very less importance to development and innovation.
- The market economy has poor business ethics as it focuses more on market competition. Whereas in the command economy government manages the mode of business and reduces unemployment and unhealthy practices.
- The market economy more focuses on profit and the command economy focuses on people’s welfare.
Conclusion
The market economy and command economy both are the economic systems, which plays an important role in the development of the economy in the country. In the market economy, the buyer or seller decides on production. The goods will be sealed at the maximum price that consumers can afford. In the command economy, the government makes decisions on production and controls the price to maintain equality in society.
Most of the countries follow the mixed economic system for the rapid growth of the economy in the country. There are some countries even now they follow only the command economy such as Cuba, North Korea so on.
The market and command economy both are good to maintain harmony in the country and for the development of every individual in the country.
References
- https://www.nber.org/papers/w13774.pdf
- https://onlinelibrary.wiley.com/doi/abs/10.1111/1467-8683.00282