Economic Decisions and Types of Economies

Remember that post a while ago when we talked about the basic economic question? How to best allocate those scarce resources to satisfy as many needs and wants?

From this 3 more questions arise:

1. What to produce?
2. How to produce?
3. For whom to produce?

Well how countries answer these questions determine the type of economy they are. We have 3 different types:

1. Planned or Command Economies
2. Market Economies
3. Mixed Economies

Planned or Command Economies

These are economies where the government decides what to produce, how to produce and for whom to produce. There is little input from market forces i.e. the forces of demand and supply. 

A great deal of planning is involved in these economies. The government aims to create greater equality among the people, and the reason for producing goods and services is to satisfy needs. Because the government decides how to produce goods and services there is often only one of each good available and a single producer. That producer, as it is controlled by the government lacks the profit incentive so there is no need to improve goods and services or efficiency. 

Today there are no true command economies but the closest examples would be China and North Korea. 

Advantages	Disadvantages
Most basic needs are provided for	Less Choice in Goods and Services
Greater equality	Lower quality of goods and services as there is no competition
	Less efficiency, higher waste as there is no competition or profit incentive

Free Market Economy

In a market economy the economic decisions are made by individuals through the forces of demand and supply. The goods and services that are produced are made on the basis of demand, so there is a profit incentive. Many firms produce goods and services which creates competition and in turn greater efficiency as firms need to keep costs low in order to survive. 

There is greater consumer sovereighty, the ability of consumers to choose what they want to consume. As a result, there is a greater range of goods and services. 

Resources are owned by individuals who will produce goods and services for profit. 

Again at this end of the continuum there are no true free market economies, the closest will most likely by the United States of Ameria. 

Advantages	Disadvantages
Greater range of goods and services	Those who can’t afford goods miss out on them
Higher quality	Greater inequality
Better efficiency
Better satisfaction of wants and needs

Mixed Economy

The middle ground of the two economies and where most of the world is at, there is production by both the private sector and the public sector. The government intervenes when the market fails (check out the post on market failure)