Title: The advantages and disadvantages of market economies (Part 2) Post by: MNbag on October 16, 2021, 04:40:31 PM Today, we will talk about the three answers to the three questions we posed in the last post: what to produce, how to produce, and how to distribute.
There are two answers to this question: market and command economies. https://i.imgur.com/HIXVrB1.png Market Economies Market economies are economies where price determines the distribution and production of resources via the price mechanism. As demand for a product rises, consumers would be more likely to pay more for the product in question in order to get it (much like an auction). As a result, the three features of the price mechanism come into action: 1. It signals firms to increase the output of the product demanded as the higher price signals that consumers demand the good. 2. It provides firms with the incentive to produce the demanded product as they would gain a higher profit by doing so, attracting new firms into the market. 3. It rations the product to the consumers who demand the product the most and have the means to purchase it. As a result, the amount of product supplied has increased, satisfying the demands of consumers. Command Economies Command economies are economies where a central committee decides what resources are produced and where do they go. When you think of command economies, you would think of bread lines, long queues, and free stuff. In command economies, all factors of production are under the control of the government. Mixed Economies Mixed economies are economies with both public (government-controlled) and private (firm-controlled) sectors. They are basically what happens when a command and market economy mix. The degree to which private and public sectors influence a country's economy varies, as some governments have a greater influence on the economy than others. This leads to the advantages and disadvantages of the two models of the economy: Advantages of a Market Economy
Note that the inverse is also true for command economies. Next time we will be talking about what happens when the three major economic questions are answered poorly by the economy, and how it can remedy the resulting consequences. See you next time! |