Resource ownership and the level of control determine the type of market system

Question

Resource ownership and the level of control determine the type of market system used in one’s culture or country. The three basic types of market systems are free market, command market, and mixed market.

Free market—refers to resources and industries owned completely by private individuals. This economy type is driven by the goal of profit determined by consumer demand. In a free market, the government maintains a distant role, only ensuring the market remains stable. The market system has many benefits, but also some drawbacks. These include possible shortages and surpluses due to market fluctuations, income discrepancies that can lead to a society of very rich and very poor, and distribution of public services.

Command market—works through central planning by a government that owns all the resources. Authorities own all resources and establish all facets of the economy, including what and how much is produced, financial compensation to workers, prices of products and who can receive them. The benefits of a true command market system include a similar quality of life—though it tends to be the lowest, not the highest, standard—for all citizens, with little homelessness and no inflation due to government price controls. The command system has a number of drawbacks including limited product selection, needs determined by the government that are truly compatible with what the society requires or wants and the restriction of personal freedoms. When workers do not own the resources, and receive the same amount of compensation regardless of what they do, there is no incentive to improve existing products or make innovations.

Mixed market—most countries in the world employ a mix of free-market and command-market systems. In an ideal mixed market, both the businesses and the government work together to meet the demand for products in the safest and most efficient manner possible. Mixed market systems are favored by a wide range of societies because they can balance diverse economic and political ideals between groups with vastly different views.

Question: Briefly summarize why the U.S. considered a mixed economy? From a consumer’s perspective, how might product and brand choices vary between a command economy and a free-market economy?

Explanation / Answer

Briefly summarize why the U.S. considered a mixed economy?

From a consumer’s perspective, how might product and brand choices vary between a command economy and a free-market economy?

command economy

free-market economy

In a command economy the government sets production and growth targets of commodities. There is only ever the production of one type of product. It gives the consumer no choice for their purchases. There is one national brand which is under the direct control of government.

There is no competition which leads to a lack of innovation and development of new technologies.

The producers lack profit motive and see no reason to “work harder” but to simply meet the quota. Therefore, quality of products might not be good.

In a free market, producers produce what consumers want at a reasonable price. It gives the consumer more choice for their purchases. There are several brands to choose from.

Free markets leads to more innovation and research & development. Firms study demand, research trends and meet the customer’s needs through innovation. This also encourages competition amongst firms to improve their product and service.

Large firms can still dominate certain markets, even where there is competition, and exploit suppliers and consumers.

command economy

free-market economy

In a command economy the government sets production and growth targets of commodities. There is only ever the production of one type of product. It gives the consumer no choice for their purchases. There is one national brand which is under the direct control of government.

There is no competition which leads to a lack of innovation and development of new technologies.

The producers lack profit motive and see no reason to “work harder” but to simply meet the quota. Therefore, quality of products might not be good.

In a free market, producers produce what consumers want at a reasonable price. It gives the consumer more choice for their purchases. There are several brands to choose from.

Free markets leads to more innovation and research & development. Firms study demand, research trends and meet the customer’s needs through innovation. This also encourages competition amongst firms to improve their product and service.

Large firms can still dominate certain markets, even where there is competition, and exploit suppliers and consumers.

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