The purpose of the following paper is to delineate the difference between pure market economy and a centrally planned economy. Additionally, the analysis shall present the difference between the two economic aspects based on problems of scarcity and choice as well as price mechanism.
Differences Between the Economies
A pure market economy is a theoretical economic system. It means that a real economy does not entirely exist and is defined as a financial system that relies solely on market allocation of resources (Welch and Welch 45). In a pure market economy, buyers and sellers dictate the price of goods through barter trade: exchange of products and services.
A centrally planned economy is a type of monetary system that a state administration has control over its operations. In retrospect, it means the government makes decisions on how the market operates rather than allow the customers and buyers to create an economic sanctity. For example, the Soviet Union economies is an example of a centrally planned economy (Welch and Welch 47). They are also known as command economies where the prices are governed indirectly by the government which sets a plan for the future.
The Problem of Scarcity and Choice
The problem of scarcity is defined as a situation when human wants are unlimited within an economic market, and the means to fulfill them are universal. Due to the shortage of resources leads to the rise of the fundamental economic problem of choice. In pure market economy decisions regarding resources are often made by the market mechanism and dynamics but not the government. The forces of demand as well as supply without any government interference (SSAG). Therefore, the problem of scarcity lies in the ability of supply which depends on the level of productivity of a particular product. For example, buyers cast their expenses in a economy; therefore, improve the supply of a product. But the production problem is equally determined by what is most profitable. Thus, if a resource is not beneficial the issue of scarcity arises. Nonetheless, in a pure market economy, buyers and sellers determine production allocation since they decide on what they can afford to buy (SSAG). Therefore, in pure market economy factors of scarcity and choice is not in existence.
On the other hand, a centrally planned economy is where the government makes all the decisions. That is, the government decides on what to produce and how it shall be produced as well as allocated to the consumers (Kwat). Production and allocation is done through planning. Therefore, planned economies tend to have a problem of scarcity due to the sanctions provided by the government on equality in consumption (SSAG). As such, the government through the planning of goods and services consumption regulates the scarcity factor hence, limits on choice.
The Price Mechanism
The price mechanism is a term that refers to how choices are made by clients and suppliers to interrelate regulate the distribution of scarce resources between opposing suppliers based on the concept of signaling function- which is the adjustment to demonstrate where funds are required and where they are not. It reflects on how prices rise and fall within a market economy.
In a pure market economy, the price mechanism is based on the values of goods besides services which are set spontaneously by the forces of supply besides demand by the consumers and suppliers (Harrodian.com). The equilibrium is reached by the participating parties which are the consumers and the suppliers without the intervention of the government policy or decision-making.
Whereas, for the planned economy, the intervention provided by the government regulates the price mechanism. The allocation of resources which the consumers need relies on the decision-making by the government which in turn determines the price of market goods and services (Harrodian.com). The equilibrium of expenditures on products and services is based on the government’s intervention to decide which goods can be supplied and which cannot. As a result, the problem of scarcity renders products and services to rise in prices while those that are not present to fall in prices.
Pure market economies are theoretical markets that are true in concept. As such, the idea defines a pure market as the interaction independence between customers and suppliers. On the other hand, planned market economies require government interference when it comes to supplying goods and services. As a result, there is a direct effect on the price of products and services due to government intervention on the supply of particular products. The problem of scarcity influences the price of commodities and services.
Horrodian.com. “Functions of the Price Mechanism.” 2018. https://intranet.harrodian.com/index.php?option=com_docman&task=doc_view&gid=159&Itemid=
Kwat, Natasha. Scarcity and Choice as Economic Problems. Economic Discussion. 2019. http://www.economicsdiscussion.net/economic-problems/scarcity-and-choice-as-economic-problems-with-diagram/18143
SSAG. The Economic Systems. 2018. https://ssag.sk/studovna/files/scarce-resources.pdf
Welch, Patrick J., and Gerry F. Welch. Economics, Binder Ready Version: Theory and Practice. John Wiley & Sons, 2016. Accessed https://books.google.co.ke/books?id=O5i-d3thv-4C&pg=PA44&lpg=PA44&dq=Pure+Market+Economy&source=bl&ots=DY7iBBkbDH&sig=ACfU3U1wYL8Rfr4H64obPA1Rxv2d20V7pg&hl=en&sa=X&ved=2ahUKEwjk15qG5vfgAhWLTxUIHYlFBsE4KBDoATAHegQIARAB#v=onepage&q=Pure%20Market%20Economy&f=false