Than a planned economy differs from a market?

The economy of most modern countries market. But there are States in which economic system is built on planned principles. What is their specificity? Than a planned economy differs from a market?

The content of the article

Facts about planned economy

The main characteristic of planned economy is the absence of a mechanism of free formation of supply and demand. What they should be (as on the dynamics and structure), calculates and sets the state. The authorities responsible for economic development, planned economic system to decide what company and what is the scope for producing a particular product or provide services.

The main source of data for calculating demand and establish proposals in a planned economy — statistics. In addition, the structure of turnover of goods and services in the economy of the state is formed based on the current policy challenges. The government can decide that citizens, for example, to anything high-tech goods, and begin to give orders to release the enterprises only traditional products.

In a planned economy, as a rule, there are no private factories, sales outlets and providing services, whose activities may disrupt the estimated balance of supply and demand. Besides the entrepreneurial activity of citizens, often contrary to the ideological principles of functioning of the state system.

In the planned economy there is no competition, causing the retention of the enterprise market. It happens at the level of industry competition, initiated by the public authorities, and the winners can get some intangible preferences — for example, honor and gratitude. Or material, but not directly related to production activities — for example, cash prizes or vouchers to the sanatorium employees.

The prices in the economic system of the planned type, as a rule, are also determined by the government. This takes into account different factors — not only the estimated demand and supply, but also the structure of needs of the citizen. She, again, must largely conform to the ideological principles that underpin the state.

Planned economy, as a rule, is socially oriented. That is, the creation of new businesses it may be largely due to the commitment of the state to provide employment of citizens. Salaries in the organizations, functioning in the framework of the planned economy, usually not too strongly dependent on the position and qualifications of the employee. The salary of the Director may be much higher than that of the head of Department. Engineer and work on the machine can also have a comparable salary.

The planned economy has a number of advantages. In the main:

  • minimum unemployment (due to the fact that many enterprises are established primarily to provide employment to citizens);
  • fair distribution of revenues received by the company, among workers and employees;
  • the minimum probability of a crisis of overproduction of commodities or services.

Have a planned economy and also disadvantages:

  • the lack of competition may be a factor reducing the quality of goods and services, their timely implementation of technological modernization;
  • very high probability of occurrence of shortages of goods and services due to insufficient elaboration of the formula for determining the demand;
  • the actual loss ratio (as a consequence subsidized) many businesses, as the cost of production in a particular region may be higher than those prices, which are determined on the average for the state.

Planned economy existed in the USSR and many other socialist countries. Today the only state with an almost fully planned economy is North Korea.

to content ↑Facts about market economy

The main feature of the market economy — the mechanism of free formation of supply and demand. If it is, then the state does not need to be a key agent of economic development of the country. But it can intervene in economic processes. For example — in the part of Antimonopoly regulation, the adoption of laws in the workplace and civil rights.

The basis of market economy — private means of production, trading and service points. Of course, the share of government businesses in the national economy can also be significant, but entrepreneurial initiative, as a rule, is not limited, and the potential this provides for the predominance of private companies in the structure of the economy. The assets of state enterprises are sold to non-state businesses through the mechanisms of privatization.

Demand structure in a market economy is usually more diverse than planned, because it almost does not feel the impact of the ideological factor. The citizens decide what they want to buy and in what quantities.

Prices in market economies are established based on the ratio of supply and demand. In some cases (e.g. when there is insufficient competition) they can be formed on monopoly principles.

But, as a rule, in a market economy, almost always there is competition for a place in the market. If the firm won’t have them — she simply will go bankrupt. This aspect is largely responsible for the presence of a minimum number of businesses that are created only in order to create jobs (how can this happen in a planned economy). Although, according to experts, social orientation of business in the modern market system is gradually becoming a trend. This is due to the principles of moral entrepreneurs and pragmatic approach: trudoustroeno, and therefore, effective population ultimately contributes to the dynamic development of the economy in General and growth of all businesses.

The main advantages of market economy:

  • competition between companies stimulates the improvement of the quality of goods and services;
  • low probability of deficit — if there is demand there will always be providers;
  • a relatively small share of unprofitable enterprises in the economy.

Have with the market economic system and disadvantages:

  • the presence of unemployment (due to the fact that the opening of new enterprises and creation of jobs may occur at a rate insufficient for the employment of residents of a particular city or region, and existing factories often closed down due to bankruptcy or the transfer of production to other places);
  • it is probable overproduction of goods and services, resulting in the emergence of crises in individual industries and the economy as a whole.

to contents ↑the Difference between planned and market economies

The main difference from planned economy to market that the economic system of the first type the mechanism of free formation of supply and demand is missing, while the second is present and is the basis for economic development. This predetermines the other differences between the considered types of farming: the level of involvement in economic processes of the state, in the degree of social orientation of enterprises in the aspects of competition, features of formation of demand from the citizens in the quality and dynamics of supply on the market.

It is worth noting that both planned and market economies are able to coexist simultaneously. Of course, you can dominate any particular model economy, but it will be visible and other elements. A similar situation exists, for example, in the economies of Cuba, Vietnam.

Defining the difference between planned and market economies reflect the main findings in the table.

to content ↑Comparative table

Planned economy
Market economy

Characterized by the absence of the free mechanism of supply and demand
Based on the mechanism of free formation of supply and demand

New industries and services are government based on calculation of supply and demand, sometimes — given the ideological factor
New production and services are created by both state and individuals — on the basis of actual supply and demand, not subject, as a rule, the influence of the ideological factor

The prices are set by the government
Rates when sufficient competition is generated on the basis of supply and demand

Is largely socially-oriented economy, unemployment is absent or minimized
Social orientation of enterprises is not so expressed, there is unemployment

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