Market Economy: Introduction
Market Economy refers to an economic system in which economic decisions and pricing of goods and services are independently determined by the collective interface of country’s citizens who constitute the buyers and businesses as the suppliers and there is little government intervention in determining the market prices, this kind of economy depends exclusively on market mechanisms to allocate resources and goods to determine the right quantities of products to be produced depending on the market demand as well as determine the prices of each product, in nutshell supply and demand in this kind of economy determine market conditions. This can be described as a government’s hands free or minimal intervention economy and it embraces or encourages freedom amongst various players to exchange commodities using market mechanisms to determine the prices.
Supply and demand constitute the major determinants of commodity prices and it is said to be based on division of labor such that prices of goods and services are determined in a free price system set by supply and demand (Altvater, 57).
Advantages of Market Economy
Market economy is driven by supply and demand thus it encourages competition amongst different firms in a location leading to efficiency as each do whatever is necessary to beat the other firms including lowering of prices which may be achieved by laying off some workers.
Market demand encourages hardwork amongst employees of a certain firm since the threat of losing ones job is in itself a motivator to outshine each other, this leads to increased and quality production which may ultimately lead to a stable economy.
Market demand leads to a great variety of consumer products but for only those who can afford, this is due to increased innovation brought about by competition amongst different firms as each try to outshine the rest through provision of new products.
From an international front, market economy attracts foreign investments since it is in itself a marketing tool on newer opportunities of generating business returns.
Market demand exposes most people to acquire the necessary skills either technical or even knowledge based for effective operation in competitive and newer economy.
Disadvantages of Market Economy
Since in a market economy profit is the main motivation, workers are bound to be exploited more in order to meet certain targets but with less pay so as to maximize profits.
Due to the fact that, market economy is profit oriented, there is bound to be overproduction of commodities since workers who constitute a social class and also who play a major role as consumers are not paid enough to comfortably buy the produced commodities.
Market economy leads to elevated rates of unemployment considering that machines and raw materials are available but using them to satisfy the needs of people who don’t have the money to pay for what could be made would not make profits for those who own the machines and raw materials thus reducing their employment powers (Ollman, 5).
Due to a low purchasing power of the lower social classes in the society, market economy leads to growing social and economic inequality which broadens the gap between the rich and the poor whose ultimate consequence is ruling out egalitarian social relations amongst the developing social classes.
Command Economy: Introduction
Command economy refers to a kind of economy controlled by the central administration such that the government planning dominates and defines he direction of economic activity and market mechanisms like supply and demand are not allowed to do so to any considerable degree. In this economy some established central body makes major decision pertaining production and wages by assorting goods to be produced, determine allocation of raw materials, fix quotas for each settled enterprise and finally fix prices.
“Command economy is a contrast of market economy and state or government controls all major sectors of the economy and formulates all decisions about the use of resources and distribution of the output” (Myers, 288).
This kind of economy was widely practiced by the Soviet Union, China and India in the past.
Advantages of Command Economy
Due to a controlled production capacities, command economy rules out possibilities of overproduction experienced in market economies.
Command economy also rules out asset bubbles which may result from massive and biased allocation such as the dot com bubble and the housing bubble experienced a few years ago.
In this kind of economy the government ensures production of good and services which may otherwise be neglected thus ensuring steady market for products irrespective of their profit margins, a common problem with market based economies.
Command economy would ensure global crisis such as market depression don’t affect county’s economy since the government ensures the economies don’t suffer from business cycles by projecting occurrence of future events and making due provisions for them to ensure they occur in a desired manner.
Command economies provide efficiency in operation amongst various players by facilitating the optimum utilization of available resources or raw materials which ensures steady production of all necessary products or commodities for development of the economies.
Disadvantages of Command Economy
The government power to detect consumer preferences, shortages and surpluses with sufficient accuracy is doubtful; this reduces effectiveness in coordination of production which may ultimately lead to imbalanced production of consumer related products.
Command economy ties production to government stability implying that if any instability in government leadership aroused, then production of all controlled commodities would be affected. A good example of this occurrence is Soviet Union collapse which led to unbalanced and shortages of basic consumer products.
Demand and supply are the major price determinants, a complete disregard to this fact would lead to wrong or biased price fixing which may affect profitability of the major business entities in the market, an happening which may rule out some players due to unnoticed high costs of production.
Command economies are authoritative in nature, this rules out invention and creativity due to lack of operational freedom as the business entities would only restrict themselves to allocated resources which are done without consideration of market principles.
Altvater, E. the future of the market: an essay on the regulation of money and nature after the collapse of “actually existing socialism”. Verso. 57. 1993. Print.
Myers, Danny. Construction economics, Spon press, London, United Kingdom, 288. 2004 Print.
Ollman, B. “Dialectical Marxism”, Market economy: advantages and disadvantages, 2004. Web.