Distinguish between a centrally planned economy and a market economy.


A centrally planned economy is an economic system in which the state or government makes economic decisions. Under a centrally planned economy, governments own all of the factors of production such as land, capital, and resources, and government officials determine when, where and how much is produced at any one time. This is also sometimes referred to as a "command economy."

In a planned economy, the decision-making is centralized so the government controls all of the supply and sets all of the demand. Prices are set by government officials.


Socialism and communism need a command economy to create a central plan that guides economic decisions.


The examples of centrally planned economy are – China, North Korea, etc


A market economy is a system where the laws of supply and demand direct the production of goods and services. Prices are fixed in a market economy on basis of the equilibrium of supply and demand.


Consumer preferences and resource scarcity determine which goods are produced and in what quantity; the prices in a market economy act as signals to producers and consumers who use these price signals to help make decisions. Governments play a minor role in the direction of economic activity.


A free market economy is an economy which the government plays a small role in.


The two fundamental features of market economics are:


1. Private ownership of the means of production


2. Voluntary exchanges / contracts


The perfect example for market economy is United States of America.


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