The economic system of functionality and existence is essential in the Economy. It takes care of how and when to produce the goods, the types of goods to be made, and who has them.
The economic system includes the market economy, command economy and mixed economy. The government or individuals will take the critical decision on the supply of goods, pricing of goods and so on.
- A market economy is an economic system in which supply and demand determine the production and distribution of goods and services, with limited government intervention.
- A command economy is an economic system where the government controls the production and distribution of goods and services, making major economic decisions centrally.
- Market economies emphasize individual freedom and efficiency through competition, while command economies focus on centralized planning and control to meet broader societal goals.
Market Economy vs Command Economy
The difference between the market economy and the command economy is that it is an economic system managed by individuals or businesses that make financial decisions. At the same time, the command economy is a system where the government makes economic choices.
The market economy is one of the economic systems where the financial decision is taken by individuals or private sectors, such as the price and supply of goods.
The command economy is another economic system where the government will take the financial decision as to what and how to produce goods. It will not depend on the law of supply and demand as the market economy does.
|Parameter of Comparison
|The economic decisions are managed by buyers and sellers based on supply and demand.
|The overall economic decision controlled by the government
|In the market economy, the goods will be supplied considering consumer preferences.
|Consumer preference will not be considered.
|It encourages the development and innovation of individuals.
|It does not encourage development and innovation.
|It has poor business ethics as more focus on market competition may lead to unemployment.
|The government manages the business mode and reduces unemployment and other unhealthy practices.
|It focuses more on profit
|It focuses on macroeconomics and social objectives
What is Market Economy?
The market economy is one of the economic systems where the financial decision is taken by individual businesses or private sectors on many factors involving the goods.
The buyer and seller will decide the price of goods, sometimes negotiation also happens. In this system, they sell the goods at a maximum price, considered the highest reasonable cost, to make the consumers buy them.
Considering 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 property, goods, and services are owned; they can decide on buying and selling prices, keeping the profit their priority.
- It focuses more on consumer preferences. If goods are produced per consumer preferences, the goods can be priced at the maximum price consumers can buy.
The disadvantages of the Market economy are
- In the market economy, individuals or businesses own property or goods and services, and 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 about the future aspects and may also practice unhealthy business.
What is Command Economy?
The command economy is another economic system where the decision lies in the hands of the government of a nation. The law of supply and demand does not play any role in this system.
The political system is involved in the command economy system, too—the decision to mass-produce products without considering the consumer’s preference.
Command economy is more focused on macroeconomics and social objectives than making a profit. It controls the price, and compared to the market economy, it gives fewer incentives to its efficient producers.
The advantages of the Command economy are
- The command economy avoids inequality by controlling the price and gives importance to social welfare than making a profit.
- It avoids or reduces unhealthy business practices
- It prevents mass layoffs or unemployment.
- It also helps government firms to overcome market failure.
The disadvantages of the Command economy are
- In the command economy, government firms will have significantly less information about the goods and services that consumers want.
- Here they do not give considered consumer preferences or want
Main Differences Between Market Economy and Command Economy
- The main difference between the market economy and the command economy is the ownership and decision-making aspects.
- In the market economy, the goods will be supplied considering consumer preferences. While in the Command economy, consumer preference will not be considered.
Last Updated : 11 June, 2023
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Chara Yadav holds MBA in Finance. Her goal is to simplify finance-related topics. She has worked in finance for about 25 years. She has held multiple finance and banking classes for business schools and communities. Read more at her bio page.