Overview
This lecture explains the differences between command economies and market economies, discusses their pros and cons, and introduces the concept of mixed economies.
Command Economies
- In a command economy, the government owns most or all factors of production (factories, farms).
- The government decides what is produced, how much, and who receives the output.
- Allocation of goods is based on government planning, not on individuals’ ability or willingness to pay.
- Examples include communist states like the former USSR.
- Command economies typically aim for fairness or equality by giving everyone the same goods.
Market Economies
- In a market economy, private individuals or firms own the factors of production.
- Production decisions are based on market demand and competition.
- Prices are set by supply and demand; producers respond by changing output and prices.
- Consumers decide what to buy based on their preferences and ability to pay.
- Competition leads to more innovation and incentives to improve products and efficiency.
- The United States is an example of a mostly market-based economy.
Mixed Economies
- Most countries today have mixed economies with features of both command and market systems.
- Governments may control key sectors like healthcare or the military, even in market economies.
- Social safety nets (e.g., food stamps, Medicaid) exist to help those most affected by inequality.
- Mixed economies balance the benefits of market innovation with some level of public control and support.
Advantages and Disadvantages
- Command economies strive for equality but may lack innovation and efficiency.
- Market economies encourage productivity and innovation but can result in inequality.
- Real-world economies try to balance these trade-offs by adopting mixed systems.
Key Terms & Definitions
- Command Economy — An economic system where the government controls resources and production decisions.
- Market Economy — An economic system where private parties make production and consumption choices based on market forces.
- Mixed Economy — An economic system blending market and government control/involvement.
- Factors of Production — Resources needed to produce goods, such as land, labor, and capital.
Action Items / Next Steps
- Review class notes on economic systems.
- Read about historical examples of command and market economies for comparison.
- Prepare questions regarding real-world examples of mixed economies.