AP Macro
Market Economy vs. Command Economy
The 3 Basic Economic Questions
• What should a country produce?
• How to produce?
• For whom to produce?
Market Economy
• An economy in which production and
consumption are the result of decentralized
decisions by many firms and individuals.
• There is no central authority telling people
what to produce or where to ship it.
• Each individual producer makes what he or
she thinks will be most profitable.
• Each consumer buys what he or she chooses.
Market Economy
• In market economies, producers are free to
charge higher prices when there is a shortage
of something and keep the profits.
• High prices and profits provide incentives for
producers to make more of the most-needed
goods and services and eliminate shortages
• Economies tend to be skeptical of any attempt
to change people’s behavior that doesn’t
change their incentives.
• For example, a plan that calls on
manufacturers to reduce pollution voluntarily
probably won’t be effective
• A plan that gives them a financial incentive to
do so is more likely to succeed.
Command Economy
• An economy in which industry is publicly owned
and there is a central authority making production
and consumption decisions.
• Command economies have been tried, most
notably in the Soviet Union between 1917 and
1991.
• They did not work very well.
• Producers in the Soviet Union routinely found
themselves unable to produce because they did
not have crucial raw materials, or they produced
them but then found nobody wanted what the
central authority had them produce.
Command Economy
• Problem with command economies is lack of
incentives (rewards and punishments that
motivate particular choices)