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 system, central authorities determine what to produce, how to produce it, and who receives the products, which contrasts sharply with market-driven economies. Command economies often aim to achieve specific social and economic goals, but they can lead to inefficiencies and a lack of innovation due to limited competition.

5 Must Know Facts For Your Next Test

1. Command economies are characterized by government control over resources, which can limit consumer choice and create inefficiencies in production.
2. Historically, countries like the Soviet Union operated under command economies, where central planners decided the allocation of all goods and services.
3. In command economies, prices are often set by the government rather than by market forces, leading to potential shortages or surpluses.
4. The focus on meeting government targets can overshadow consumer needs and preferences, resulting in a mismatch between supply and demand.
5. Transitioning from a command economy to a market economy can be challenging, as it often involves significant economic reforms and social adjustments.

Review Questions

• How does a command economy differ from a market economy in terms of decision-making processes?
  • In a command economy, decision-making is centralized, with the government determining what goods are produced, how they are produced, and who receives them. This contrasts with a market economy, where these decisions are driven by supply and demand dynamics. In a market economy, individuals and businesses make choices based on their preferences and market signals, leading to competition that can foster innovation and efficiency.
• What are some advantages and disadvantages of operating under a command economy?
  • Advantages of a command economy include the potential for coordinated efforts toward national goals, such as rapid industrialization or equitable resource distribution. However, disadvantages often include inefficiencies due to lack of competition, limited consumer choices, and potential for bureaucratic delays. The government’s role can stifle innovation since there is less incentive for businesses to improve products or services without competition.
• Evaluate the impact of transitioning from a command economy to a market economy on social structures within a society.
  • Transitioning from a command economy to a market economy can significantly impact social structures by altering power dynamics, creating new economic opportunities, and leading to wealth disparities. As markets open up, individuals gain more freedom to make economic choices, which can empower entrepreneurship but may also result in increased inequality as some thrive while others struggle. This shift often requires substantial adjustments in societal norms and may provoke tension between those benefiting from the new system and those feeling left behind.

Related terms

Planned Economy: An economic system where production and distribution decisions are made by a central authority, often synonymous with command economies.

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

Market Economy: An economic system where supply and demand determine production and pricing decisions, contrasting with command economies.