Differences between planned economy and market economy

Although the types of economies are similar, the way in which economic activities are carried out allows them to exist differences between planned economy and market economy.

Both of them economic models They are intended to achieve the highest level of productivity. The planned economy is a system organized and managed by the government, therefore, they do not have free-market decision-making fluid, but they have centralized planning.

On the contrary, the market economy is determined through demand and supply, its decisions are made according to the fluidity of the free market. In this article, we will expand on what each one consists of and the differences between planned economy and market economy.

What is the planned economy?

This type of system also known as centrally planned economy, the decisions of investments, production, prices and distribution are made by the State and its objective is to increase production once it obtains the information about it, to be able to make decisions related to distribution and prices convenient.

The government is the one who has the authority to regulate market transactions. This structure that is present in companies that belong to the government totally and also to private ones, but that are also directed by the State.

Characteristics of the planned economy

Among its main characteristics, the following stand out:

• It is a planned system: The government organizes this type of system in a structured way, through an action plan where it is point out points such as availability of resources, productive objectives, periods of time and the application of technology.
• Rigid control of standards: It does not allow companies to apply innovations or make decisions, it limits the application of new market strategies and the design of new products or services.
• State properties: In this system there are no private properties, since they are state. The government is the one in charge of managing and distributing the products and resources as best suits it.

Advantages of the planned economy

• The advantage of this system is that the State is the one who connects capital, production and profit without interventions to achieve the economic purpose of the State.

Disadvantages of the planned economy

• It is a system that does not allow the consumer to decide on their preferences and market scarcity, therefore, they do not achieve the expected objective.

What is the market economy?

This economy is based on a system of economic relations related to sales and exchange. The government cannot interfere in the decisions of this system, which means that the same companies have the freedom to make their own decisions.

The market economy It is governed by private ownership of resources, it can use a market system and prices to organize and manage different economic activities. It is an economy that mainly guarantees the freedom to the consumer to choose their products or services within the market.

Characteristics of the market economy

The most important characteristics of the market economy are:

• Business freedom: Companies have the freedom to choose their activities and consumers have the opportunity to buy the product they want.
• Private property: The different types of private companies have total freedom and economic independence.
• Price fixing: Prices in this system are established according to the interaction of supply, demand, therefore, production must be efficient.

Advantages of the market economy

• Facilitates product selection for consumers.
• It promotes competition and price flexibility.

Disadvantages of the market economy

• It is not focused on society, but on improving profits.
• Only markets with large investment capital can participate.

Differences between the planned economy and the market economy

When analyzing these two economies, similarities and differences can be found, however, both focus on increasing productivity. In these systems, you can notice the intervention of governments in terms of decision-making, but despite this, they have important differences such as those shown below:

Freedom of consumption

• Within the planned economy, few make decisions about what to consume, what to produce and where or how to live, among others.
• In the market economy, people have the freedom to command the market and services depending on their needs and wants.

Shortage, excess and consumer needs

• Planned economies cannot know what the needs of consumers are, or how much shortage or excess there is in the market.
• However, in market economies they have a functioning that depends on their own factors.

Technique of operational functions

• The planned economy carries out its operations according to the plans made in advance by the government.
• While the market economy operates depending on the functions of the demand and supplies of the market.

Decision making

• Within a planned economy, the government is the one who makes the decisions that relate to production, investment, distribution and pricing of products or services.
• On the contrary, in the market economy there is no one who makes the decisions, however, they carry out their operations with free market flows.

Currently there are no pure market economies, since they are mixed and are a combination that only shows some differences between planned economy and market economy.

In the planned economy, companies and the production system belong to the government and a small private sector, since the State is the one who controls and manages production. In contrast, in the market economy, the production system and company ownership are private, the government only enforces the laws to prevent society from harming itself.