Introduction to economics - Assignment Example

In this way, economic power is widely dispersed. But in a planned or command economy, resources are publicly owned and economic decisions are made through central economic planning. This is because a central planning board determines major economic decisions. In free market economy, the individual freedom is valued and motivation comes from each agent’s self-interest in maximizing their income through individual decision-making. Buyers can freely choose what goods and services to purchase and at what price while sellers can freely decide what goods and services to produce and in what quantity.

As to a planned economy, business firms are owned and controlled by the government, so they produce according to the central planning board’s directives. Free market economy is an economic system in which trading and exchange of goods, services and information takes place in a free market (Economywatch.com 2011, par.1). This means that under this economic system, markets are guided by the “invisible hands”. Law of supply and demand set market prices and all individuals in the economy have full knowledge about it.

Individual decisions and preferences are communicated and coordinated through the mechanism of the market system. Government is kept from interfering within the economy as any interference may disturb the efficient functioning of the market system. Their role is limited to private property and making appropriate legal framework in which free market functions. The advocates of planned economy do not agree with this as they see the market as imperfect and therefore they recommend government intervention to correct market failures.

Production targets for each firm are set by the central planning board including the amount of resources to be allocated. Even the distribution of output is determined and planned centrally. Both free market economy and planned economy have their advantages and disadvantages. The Great Depression was being blamed to the imperfect market system and inefficient business cycle. So, the United States government tried to intervene in the economy but still the effects of economic recession in 2008 was felt by most of the economies in the world.

Because of these, most economies of the world are applying the mixed economic system, mixing the characteristics of a free market economy with a command economy. Real world economies are arrayed between the extremes of free market and planned economy (McConnell and Brue 1993, p.31). The United States economy, for example, leans toward free market system which is basically structured with the principles of economic freedom but the government plays an active role in promoting economic stability and growth, in providing goods and services which are either underproduced or not produced at all by the market system and in modifying the distribution of income.

While some command or planned economies before like China and India are now economically successful after following the principles of market oriented economy system. This means that the mixed economy is more conducive to efficiency in the use of resources, stability of output and employment and rapid economic growth because even if the government has some level of regulatory control over the markets, the decisions are still left to the buyers and sellers in the