Free Market Economies V Planned Economies

A planned economy is also called a central planned economy or a command economy. This system is based by decisions such as what to produce, how to produce it and who to produce for. All this decisions are made by a central body and in this system the central body is the government. The government sets up everything, they decide the wages and decide the prices through central planning. The government decides for the people and for their best interests. The decisions they have to make are numerous and that makes planning very difficult. It is almost impossible to accomplish a satisfactory level of efficiency, if someone adds the need to forecast future events. A planned economy has many advantages like competition is avoided, they concentrate more in life such as in hospitals, education, there is low percentage of unemployment, prices are normally kept under control and affordable for people, and there is less inequality of resources.

A free market economy, also called a private enterprise economy or capitalism use prices to portion goods and services. Every single production is managed by a private company, there is no government intervention. The companies set wages and prices in the economy. Companies make independent decision of what to buy at given prices and producers decide if they want to buy those products. Producers’ decisions are changed if the form of demand is altered because then there will be changes in the amount of supply. When consumers and producers work for their own interest, the market works to give the best outcome for both, consumers and producers. Many of the advantages of a free market economy is that there is little government intervention, prices are set up based on how much the population can afford, unlike a planned economy the population can buy or reject goods freely, demands for a product or service create more jobs for people, people are motivated to improve their lives economically as there is no government limiting of what they can gain. A free market economy can easily control if there is too much demand of a supply as companies can change what they produce instead of going through the government first, there are many varieties of goods and services and it encourages competition. However many of the disadvantages of this type of economy makes us doubt on it. Companies can fail in providing goods or services, some companies offer more goods and services to people who are economically better than others, some members of society will not be able to work and therefore will not be able to earn and since there is no government intervention, they get no help.

I believe a free market economy is the best option for people. It is complicated for a planned economy to control the total production, investment trade and consumption therefore there will be misallocation of resources and shortages. The government is the one that makes the decision and these can lead to a loss of freedom of choice. Some governments may not share the same ideas as the majority of the population and since they have absolute power they can apply plans that may not convince the population. Workers and managers do not gain profits and are difficult to motivate. 





Information extracted from:
IB economic text book
http://en.wikibooks.org/wiki/IB_Economics/Introduction_to_Economics/Free_Market_vs_Planned_Economy