Explain the main differences between a command economy and a free market economy.
An economy may be defined as the state of a country or region in terms of the production and consumption of goods and services, and the supply of money.
A planned economy is an economic system in which economic decisions are made by centralized planners, who determine what sorts of goods and services to produce, how they are to be priced, and allocated. Since most known planned economies rely on plans implemented by the way of command, they have become widely known as command economies. These are generally associated with socialist or communist economic systems.
A free market economy is an economy in which the allocation for resources is determined only by their supply and the demand for them.
Every economic system is based on a different philosophical stand than the others. These differences are caused by the different responses that each economy has to the problem of scarcity. However, economies dont always work as their theoretical models and take some components from each system to develop an economy that works. Thus, economies are graded as being free market economies or planned economies using a tool called the economic spectrum, where the planned economies are placed on the left and the free market economies on the right.
Below is the spectrum along with the different names that each economy may be known as.
Centrally Planned Mixed Economy Free Market
The most striking difference between a command economy and a free market economy is the degree of government intervention.
In a command economy all the economic decisions are taken by the government, whereas in a free market economy all economic decisions are taken by individuals and firms, which are assumed to act in their own self-interest.
In a command economy all land and capital is owned by the state as contrasted to private ownership in a free market economy.
In a command economy, the state plans the allocation of resources between current consumption and investment for future, the output of each industry and firm, methods of production and the resources allocated to each industry and firm. In a free market economy, the output is determined by the quantity demand, the techniques of production by the firms themselves keeping in mind efficiency and productivity.
In a command economy, the distribution of goods and services among the population is planned by the government, based on their assessment of the peoples needs; whereas in a free market economy the population may acquire the goods and services as per their specific needs at the price fixed by the seller(s).
A command economy has price controls in place, which means that the government fixes the price of all goods and services and they must be sold at that fixed price. In a free market economy the prices are fixed by the seller(s) of the goods and services, as guided by the laws of demand and supply.
Thus, the two types of economies display a difference in answering the three basic economics questions:
Therefore, the structures of a command and free market economy may be summed up as:
Pillars of a Centrally Planned Economy Pillars of a Market Economy
Evaluate the costs and benefits of moving from a command economic system to a free market system using Poland as a case study.
In 1989, Poland became the first member of the former Soviet bloc to reestablish political democracy and a market economy. The fledgling government was faced with a stagnant economy, inflationary pressure, a large external debt, and market inefficiencies. Gross domestic product (GDP) growth rate was nearly stagnant, growing by only 0.2 percent, consumer prices had risen by 250 percent, and real wages increased by a mere 9 percent. In view of the economic situation, the new government introduced radical measures that were intended to stabilize the economy and encourage the development of a free market. The countrys much publicized "shock therapy" had begun. There was massive a cut down in government spending, private enterprise was allowed and the government sat back and watched. Initially the inflation rose and the situation seemed to be worsening, when entrepreneurship and the laws of supply and demand kicked in, and the free market economy began to materialize.
In 199091, Poland experienced a deep recession throughout which GDP decreased by almost 20 percent, the