Outline the main features of a market economy and compare them to a command economy.

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Economics.

  1. Outline the main features of a market economy and compare them to a command economy.

For any economic society to survive it must first choose a suitable economic system best suited to the country and will allow the countries people to produce goods and services for the consumer. There are 3 main economic systems that exist in the world today such as a market economy, command economy and mixed economy.

No one economy in this world today is either wholly a market economy or command economy. There are only mixed economies, this is because no economy is fully run by the state or has no state intervention whatsoever. All economies though will face the same questions but the way they answer these questions is how these economies differ. These problems are in the form of three different questions – what will be produced? How will they be produced? Who gets what is produced?

A market economy tries to solve these questions with only enough government regulations to protect property rights against theft and aggression. The way it does this is be allowing free play in the market meaning that anyone can take part in the economic activity. This free play system is often referred to as laissez-faire which translates to ‘let it be’, meaning that if it isn’t wrong, don’t change it. This laissez-faire system allows entrepreneurs the freedom to buy what they want and sell what they want, to whoever they want. This system also allows the consumer to spend their money however they please without having to worry about paying any such taxes as there are state owned services. This is possibly the most important aspect of the market economy as it allows the producer to determine what the consumer really wants by listening to their demands and then deciding how they use their economic resources to meet these demands. This is the basic way in which the price system works. The price system is a way of communication between the entrepreneurs and the consumers. The producers will supply a certain amount of a good or service and then by consumers using or buying the god or service the producer can determine whether or not the good or service is in high or low demand, this ultimately is what determines the price of the good or service. So if the supply of the good or service is low and the demand is high the price of that good or service will also be high allowing the entrepreneur to make a profit as the cost of producing the good or service is a lot lower than the producer can charge for it allowing them to make a high revenue and ultimately a high profit.

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In a market economy no company is owned or operated by the state, meaning that everything is privately owned by entrepreneurs and investors. The downfall of this is that needs are not catered for, only demands. However, the goods and services that are demanded are not necessarily those which are best for you. These are known as demerit goods (the opposite of this is a merit good. Merit goods or services are those which are good for you). The downfall of only catering for demands is that people that really need basic things such as food and water will not ...

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