Market Economy: producers/entrepreneurs take risks to
establish businesses because they expect to be rewarded with
profits for satisfying demands of consumers.
Command Economy: firm managers are rewarded by the State
with vacations, bonus pay, special housing, etc. for meeting
planned output targets or goals.
Incentives: rewards (or consequences) that motivate behavior
Profit = revenue - expenses
Incentives influence people’s behavior in both market and
command economies. The reward systems may seem similar but
they often lead to very different results.
It is difficult to establish output targets in a command economy.
Read Activity 1
Why are the lot owners able to charge more on days when
there is a football game or big event?
Since the cost of providing parking spaces is not greater on
these days, why do the owners raise their prices?
If the lot owners are allowed to charge whatever they like,
what will happen over time if they are earning high prices?
Supply and Demand
Supply of goods balances with demand to dictate prices
What would the greater supply do to the price of parking
spaces in the long run?
An important function of higher prices is their ability to
ration goods and services to those who value them most.
Instead of waiting for greater supply to lower prices, the
city council decided to pass an ordinance to keep prices
low now. What will be the impact on game day?
If the prices were kept very low, what other way might
parking spaces be rationed to consumers?
2x4
3x6
4x8
Output Goal #1
Fill the lot
Output Goal #2
Fill the lot with as many
cars as possible
Output Goal #3
Fill the lot as much as possible
with an equal number of
each size car