Question

1. Distinguish between a Pure Market Economy and a Centrally Planned Economy. Discuss how both forms of economies deal with... (a) The problems of scarcity and choice. (b) The price mechanism. (c) International Trade.

Answer 1

1. 
   a. In the pure market economy with the scarcity, the problem of what to produce, how to produce and for whom to produce is purely solved by the market forces demand and supply.
   The consumer is considered as a king of market and problem of choice of what to produce is based on his decision making. Producer only produces a product which consumer demands. Choice of how to produce totally depends on producers, and they will choose the most efficient way to produce. In for whom to produce income plays the role, high-income holders lead to purchase more of good and low-income lead to less of it. So that’s how market economy takes the decision of choice.
   In the centrally planned economy, all the market problems of choice are solved by the government. Government decide what is best for the economy to produce and consumer does not intervene. How and for whom to produce is also set by the government entities by making policies which are in a favor of welfare of both the consumer as well as producer.
   b. Price mechanism is work by the demand and supply in the market economy. Price is determined where the quantity demanded and quantity supplied are equal.
   Price mechanism in the centrally planned economy is purely regulated and controlled. Government authorities decide the price of the product for consumers. They set high prices for rich ones and low for poor ones as they work for social welfare. But there are no rational calculations.
   c. Pure market economy welcomes the international trade as it increases the competition and so efficiency in the market. But in case of the centrally planned economy, the government barely allows for international trade as it increases the competition and due to which home country producer cannot survive in the market. So, because centrally planned economy works more for the welfare than efficiency and rationality, they try to avoid international trade by their policies.