Strengths and Weaknesses of the command economics system
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Published: Fri, 21 Apr 2017
The basic economic questions arise because of the basic economic problems of resource scarcity.
What to Produce
We are confronting the problem of resource allocation when the question of what to produce emerges. Since our wants are huge and the resources to satisfy them are limited, we have to set our priorities and when we do that, we are deciding on what to produce. For example
In the Command economy, the state is said to be the ones that own resources and the central authority of the state controls and direct the resources, it is through the estimates of the wants and needs of the people that this is achieved. But in the free Market economy, the ownership and control of resources is granted to private individuals. Price mechanism and the market forces of demand and supply and the free consumer choices and producers would determine allocation of resources or what to produce or how it is allocated.
How to produce
When this question is asked, the technology method of production applied on what to produce is being referred to. Capital intensive and Labour intensive methods are all forms of methods of technology, but whichever method is used, the cost per unit of output should really be considered
Whom to produce
This is a problem of distribution, in other words how will the goods produced be distributed. This depends on the needs of the society and the personal income distribution. Goods need s to be taken to where they can be consumed or utilised in other for the completion of production process.
Economic systems are therefore created on the basis of determining the resources of allocation. It is a system were all the institutional means through which national resources are used to satisfy human wants and needs
These are the types of an economic system
Free Market economic system
Mixed Economic System
Free Market Economy
This is an Economic system that allows for the right of private firms, institutions or individuals to own and control resources and also granted rights to contend for economic benefits. It is also where production and distribution of resources happens based on the free market mechanism by a free price system
The characteristics of free market economy
Price mechanism is in place
There is little or no interference from the government
Freedom of entry and exit
The question on what, how and for whom to produce are answered by the private sector
Price mechanism: Demand and supply determines prices
Freedom in profit making
USA, Mexico, Canada and Somalia are good examples of countries with a free market economic system.
This is includes a variety of government and private control, in other words, a mix of socialism and capitalism. As stated by business dictionary, all modern economies are mixed where means of production are shared between the private and public sectors. It is also called dual economy.
Features of Mixed Economy
An efficient and adequate allocation of resources
Incentives to innovate provided by competition
The government ensures the maintenance of employment standards
Centralised economic planning
In a command system, decision making is centralized in other words the government controls all decisions with regards to the allocation of resources. They decide on what to produce, the proportion of what should consists of capital goods, the proportion of resources to be devoted for consumers etc. In command economy decision making is a centralised Process.
The strength and weakness of the Command Economy
Increases the constant usage of resources.
Allocates wealth among the people equally to avoid any problem of unfairness.
Only products that are required are produced hence prevents production of socially undesired products.
The government will ensure a more equal distribution of income and wealth
Essential goods/services will be provided to the community. For e.g. Education.
The government can determine which goods are produced. It has the power of decision making.
It provides a minimum standard of living for all citizens.
Freedom of choice is restricted
Cannot detect consumer preferences accurately.
Resources are misallocated as consumer demands are not satisfied by production.
Resources are not fully utilized, since production is based on home consumption
No specialization and division of labour
Lack of efficiency.
There is little consumer choice. Since everything is allocated according to a planning process, consumers will have little say in what is provided directly by the state.
Little variety of goods and services
There is no price mechanism, i.e. interaction of demand and supply in determining prices of goods
Subsidies on essential goods and services quickly lead to shortages. Therefore queuing is common in command economies.
The Difference between The Command Economy and other Types of Economic Systems
Command economies have public enterprises where the government controls things including businesses and production.
A mixed economy is an economy that includes a variety of private and government control
capitalism involves private enterprises where businesses are owned by private individuals
free market system is where prices/consumption/production are driven freely
It is driven by demand and supply
It is driven by demand and supply
Distributes wealth in one single method
dwells more on the exchange of wealth in various methods
capitalism refers more to the production of wealth
This is predictable and orderly but creates much inefficiency
There is free competition without interference
There is no free competition, capital owners can at times influence the terms of trade
the government also intervenes to ensure safety
An ‘invisible-hand’ regulates the economy.
A command economy is where everything is planned by some central planners
The three selected types of economic systems are the basic branches and of them all the command economy is highlighted as it is an economy where price and supply are not regulated by forces of the market but it is regulated by the government, they decide what goods and services are produced and the distribution method. At present day, there is rarely any country practicing command economy, the remaining countries using command economy are Cuba and North Korea
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