Economics

PLANNED MARKET ECONOMY

In a planned economy, the government decides all economic decisions from the allocation of resources to the distribution of the products. Market forces do not determine the price of goods and services. Furthermore, profit making is not their main interest as their main goal is to provide goods and services to all citizens.

Advantages

1) Prices are kept under control so that everyone would be able to afford the goods and services.

2) No duplication as the government plans the allocation of resources.

3) No wastage of resources in the absence of competition between companies.

4) Unemployment rate is low because the government aims to provide a job for every citizen.

5) Income inequality is much lower.

6) Greater equality

Disadvantage

1) No freedom of choice for producers and consumers on the goods and services. Quality of the good and services provided may be at a very low standard.

2) High inefficiency in firms, as people is not motivated to work to earn profit.

3) Difficult for central planner to get and up to date information of customer needs which leads to problems of allocating resources to consumer need.

Examples

North Korea and Cuba

FREE MARKET ECONOMY

A free market economy is identified where government do not interfere with businesses. People and firm privately own resources and profit making is the main goal of the companies. This allows market forces to determine the allocation of scare resources through price mechanism. Based on demand and supply, consumers are free to buy goods and services of their choice and producers allocate resources based on it. Producers have the power to choose what to produce, the amount they want to produce and whom they produce for.

Advantage

1) Allocation of resources is more efficient

2) Less wastage in a competitive market.

3) Lower cost of production

4) Consumers get better quality goods and services at cheaper price.

4) A much wider choice of goods and...