AP Macro Market Economy vs Command Economy The

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)