Command Economy

Definition

A command economy is an economic system in which the government or a central authority makes all the decisions regarding the production and distribution of goods and services. This type of economy emphasizes state control over resources and typically prioritizes collective goals over individual preferences, which directly relates to concepts of scarcity, choice, and opportunity cost as the government determines what is produced and how resources are allocated based on perceived needs rather than market demands.

5 Must Know Facts For Your Next Test

1. In a command economy, the government typically owns the means of production, including factories and land, which can lead to inefficiencies due to lack of competition.
2. Central planners in a command economy often use five-year plans to set production goals and allocate resources for various sectors of the economy.
3. Command economies can struggle with innovation because there is less incentive for individuals or businesses to develop new products or improve processes compared to market economies.
4. The Soviet Union is one of the most notable examples of a command economy, where state control extended to nearly all aspects of economic life.
5. While command economies aim to eliminate inequalities created by market economies, they often face challenges such as resource misallocation and shortages of goods.

Review Questions

• How does a command economy address the issue of scarcity compared to other economic systems?
  • A command economy addresses scarcity by having a central authority allocate resources and determine production based on perceived societal needs. Unlike market economies where supply and demand guide decisions, a command economy aims to eliminate competition and inequality by prioritizing collective goals. This centralized approach can lead to effective solutions for certain societal issues but often results in inefficiencies and mismatches between supply and actual consumer demand.
• What are some advantages and disadvantages of a command economy in terms of opportunity cost?
  • In a command economy, advantages include the ability to mobilize resources quickly for large-scale projects and eliminate unemployment through guaranteed jobs. However, disadvantages arise from opportunity costs associated with government decisions that may ignore consumer preferences. The focus on meeting quotas rather than responding to market signals can lead to the misallocation of resources, creating shortages in some areas while wasting potential in others. This rigid structure often results in lost opportunities for innovation and efficiency.
• Evaluate the impact of transitioning from a command economy to a market economy on individual choice and opportunity cost.
  • Transitioning from a command economy to a market economy significantly impacts individual choice and opportunity cost. In a market economy, individuals gain the freedom to make their own economic decisions, allowing them to choose what to produce, consume, or invest in based on personal preferences. This shift enhances efficiency as resources are allocated according to consumer demand. However, it also introduces new opportunity costs as individuals must weigh their options more carefully; unlike in a command economy where choices were largely made for them, they now bear the responsibility for their decisions within a more competitive landscape.

Related terms

Planned Economy: An economic system where the government determines production levels, prices, and the allocation of resources through centralized planning.

Market Economy:

An economic system in which supply and demand dictate production and pricing, allowing for individual choices and private ownership.

Scarcity:

The fundamental economic problem of having limited resources to meet unlimited wants, which necessitates making choices about resource allocation.