Basically, in a market economy, economic activities are not planned, they take place as per the interaction of economic agents. As against this, in a command economy government has full control over the economic activities.
An economy is nothing but a framework within which the economic activities are undertaken. It is that system operating in the country which organizes, coordinates and balances the economic activities, i.e. production, distribution, consumption and exchange of goods and services to meet the needs of people.
Both market economy and command economy are two opposite ends of the economic setting. The basic difference between these two lies in the way prices are determined, division of labour, government interference, distribution of income, etc.
Content: Market Economy Vs Command Economy
Comparison Chart
| Basis for Comparison | Market Economy | Command Economy |
|---|---|---|
| Meaning | Market Economy is one in which the demand and supply forces decides the production of goods and services and their prices. | Command economy refers to an economic system, where all the economic decisions are taken by the government and industries are publicly owned. |
| Regulated by | Producers and Consumers | Government |
| Price mechanism | Used | Not used |
| Land and other resources | Owned by private individuals and firms | Owned by the government |
| Growth Rate | Rate of economic growth is high | Rate of economic growth is low |
| Income inequality | Yes | No |
| Objective of production of goods | Profit objective | Social objective |
| Production decision | Based on consumer demand in the market | State decides the production |
| Resource Allocation | Decided by Consumer and factor markets | Decided by Central planners |
| Economic Equity | People can freely choose their work and use their resources and capabilities. | People cannot freely choose their work or change jobs. |
| Economic Security | People are responsible for their economic security. | Government guarantees economic security. |
Definition of Market Economy
A market economy is an open economic setting characterised by the free flow of commodities between buyers and sellers, based on its demand and supply in the market. In this economic system, the decisions concerning production, distribution and investment are ascertained by free competition between businesses.
In a market economy, the factor markets have a crucial role to play in the allocation of resources, such as land, labour, capital etc. Here, businesses have the liberty to manage and use productive resources as required, intending to earn profit by creating products or delivering services which are valued by people. Wages in this economy reflects the contribution of the members.
The salient features of the market economy include – freedom of individual choice, less government intervention, private ownership, competitive pressures, motive of self-interest, encouragement to innovation, etc.
There is an assumption as to the economic activity in the market economy that the businesses seek to offer their product at the highest price which the customers are willing to pay however the customers will try to get the product at the lowest price.
Definition of Command Economy
Command Economy is one in which the government separately or jointly owns the factors of production. The central problems of the economy, i.e. what to produce, how to produce, when to produce, how much to produce, for whom to produce, and at what price goods are to be offered for sale, will be ascertained by the government only.
The central government has the authority to take all the economic decisions. And to do so, the central planning authority determines five-year plans in which economics and societal objectives are defined for different sectors and regions. Moreover, resources are allocated by the central planning authority in the best possible manner.
It is the central planning authority which sets preferences as to the production, distribution and consumption of goods and services. The products are produced on the basis of the requirements of people. It aims at fulfilling the basic needs of all the people in an efficient manner. The government decides the job and pay for the workers.
Key Differences Between Market Economy and Command Economy
The difference between market economy and command economy are described in the points below:
- A market economy is an economic setting in which free flow of goods and services takes place, on the basis of their demand and supply. Further, the resources are owned and controlled by private individuals and businesses. Conversely, an economy is said to be command economy in which the government owns and controls the factors of production and also decides the distribution of output.
- Producers and consumers regulate a market economy. However, it is the government which governs a command economy.
- The price mechanism is used in the market economy and not in a command economy, as the prices as set by the state. Hence the price level in a command economy is low, whereas in a market economy it is high.
- In a market economy land and other resources, i.e. capital, labour, material etc. are privately owned, but the same is publicly owned in case of a command economy.
- The rate of economic growth is high in the market economy, as compared to the command economy, which can be seen in their standard of living.
- When it comes to income distribution, in a market economy, there is an unequal distribution of income while the command economy has an equal distribution of income.
- In a market economy, the main objective behind the production of goods is profit, whereas, in a command economy, the primary objective of production is the welfare of society.
- In a market economy, the consumers and business houses play an important role in production decision. In contrast, in a command economy, it is the government which decides what is to be produced as per the plan which depends on the calculated needs of the people.
- In a market economy, the consumer and factor markets decide the allocation of resources. On the contrary, central planners state the resource allocation in a command economy.
- In a market economy, workers are free to choose work for themselves and use the resources and capabilities. As against, in a command economy, the workers cannot freely choose their work or switch jobs. It is the government who decides the wages to attain income equality.
- In a market economy, people work to ensure their economic security in terms of retirement, healthcare, housing, clothing, etc. On the contrary, the government assures economic security to the people, in a command economy.
Conclusion
Every economic setting aims at satisfying the needs and wants of its people by efficiently using its scarce resources. In a market economy, the government has little to no influence over economic activities, whereas in a command economy government has full control over economic activities.
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