key term - Command Economy

Definition

A command economy is an economic system where the government makes all the decisions regarding the production and distribution of goods and services. In this type of economy, the government controls major industries, sets prices, and determines what to produce, aiming for equal distribution of resources. This system contrasts with market economies, where supply and demand dictate production and pricing.

5 Must Know Facts For Your Next Test

1. In a command economy, the government not only owns resources but also directs how they are used, eliminating competition in favor of centralized control.
2. These economies often prioritize equitable distribution of wealth over efficiency or innovation, which can lead to shortages and surpluses.
3. Historical examples of command economies include the former Soviet Union and North Korea, where the government exercised tight control over all economic activity.
4. A major criticism of command economies is that they can stifle individual freedoms, as personal choices in consumption and investment are heavily restricted.
5. Command economies may struggle to respond quickly to consumer needs because decisions are made centrally rather than through market signals.

Review Questions

• How does a command economy differ from a market economy in terms of resource allocation?
  • In a command economy, the government makes all decisions regarding resource allocation, determining what goods and services are produced and their prices. In contrast, a market economy relies on supply and demand to guide these decisions. This central planning can lead to inefficiencies as it may not respond quickly to consumer preferences, while a market economy is more adaptive to changes in demand.
• Evaluate the advantages and disadvantages of a command economy compared to other economic systems.
  • The advantages of a command economy include reduced inequality in wealth distribution and the ability to mobilize resources quickly for large-scale projects. However, disadvantages include inefficiency due to lack of competition and innovation, potential for government overreach in personal freedoms, and difficulties in meeting consumer needs effectively. Other systems like market economies may promote innovation but can also lead to significant inequalities.
• Assess the long-term viability of command economies in today’s globalized world compared to market-oriented economies.
  • Command economies face significant challenges in today's globalized world due to their inflexibility and inability to adapt quickly to market changes. As countries become more interconnected, those with command economies may struggle to compete with market-oriented economies that foster innovation and responsiveness to consumer demands. This tension raises questions about their sustainability, as historical examples show that many command economies have either transitioned towards market mechanisms or faced economic collapse due to their rigid structures.

Related terms

Planned Economy: An economic system where the government plans and regulates the production and allocation of goods and services.

Socialism: An economic and political system where the means of production are owned or regulated by the community as a whole, often through the government.

Market Economy:

An economic system where supply and demand guide production and pricing, with minimal government intervention.