What is the difference between free-market and centrally planned economies?

1 Answer | Add Yours

dkrupp87's profile pic

dkrupp87 | (Level 1) Adjunct Educator

Posted on

Market economies and centrally-planned economies, often known as command economies, are very different. In a market economy, the activity is unplanned. Meaning people determine what occurs in the economy. What to produce, what to sell, where to produce, how much to produce, and how much to sell a product for all determined by the market, or the supply and the demand. In a market economy, the means of production are privately owned by individuals or companies, and there are voluntary exchanges and contracts. This means that businesses own the resources and are free to create their own exchanges and contracts without government decrees. Prices are determined naturally through supply and demand. In a command economy, all of the means of production (land, capital, and resources) are owned by the government. Government officials determine when, where, and how much to produce at one time. Prices do not arise naturally through supply and demand, as the government determines the supply and sets the demand. It is also important to note that profits in market economies determine resource allocation, where in a command economy political factors determine resource allocation.

We’ve answered 319,643 questions. We can answer yours, too.

Ask a question