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Market vs. State-Controlled Economies

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  • 0:01 Buying Habits
  • 0:55 Market Economy
  • 3:10 Command Economy
  • 4:25 Mixed Economy
  • 5:35 Lesson Summary
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Lesson Transcript
Instructor: Jessica Whittemore

Jessica has taught junior high history and college seminar courses. She has a master's degree in education.

This lesson will highlight the differences between a market and a command economy. In doing so, it will explain communism, as well as the concept of a mixed market economy.

Buying Habits

One of my best friends is a shopping pro, and being that I'm not much of a shopper, her tactics seem rather odd yet very impressive to me. For instance, at the end of every season, she shops the sale racks for next year's clothes. While the rest of us are buying winter coats, she's buying swimsuits at half price. Whenever I give her that 'You're nuts look,' she always holds up the price tag and retorts, 'It's supply and demand, baby. It's supply and demand.' In other words, while everyone else flocked to the stores in May to buy swimsuits, thus making the price rise, she waits until November when no one wants a swimsuit, and they're half off. Likewise, while the rest of us are paying full price for a winter coat in November, she bought her coat in May for a fraction of the price. Although this seems rather overwhelming to me, my friend's shopping habits are a great lead into today's lesson on the differences between market economies and state-controlled economies.

Market Economy

Since the United States economy and my friend's shopping idiosyncrasies are a great example of a market economy, we'll start with it. Stated very simply, a market economy is one in which economic decisions, such as pricing and what to produce, are based on supply and demand.

Within a market economy, it is the buying habits of the people that govern the production and pricing of goods. In other words, a market economy provides lots of coats in the winter because they know people want them and are willing to pay for them, whereas they provide swimsuits in May because they know they're the season's hot ticket item.

In a market economy, the government does not step in and tell producers what needs to be made, nor does it walk around carrying a big pricing gun. Instead, prices and production ebb and flow as the people decide what they want to see on store shelves and how much they are willing to pay for it. With this in mind, it's important to note that market economies are driven by profit. The more producers and sellers can get for a product, the more they will take.

Since my family owns a grocery store, the market economy is a very huge deal to us. For instance, holidays are a perfect example of the market economy at work. Every year, around September, our store gets a notice from our supplier telling us it's time to stock our shelves with canned pumpkin to get ready for Thanksgiving. However, last year, due to an abnormally wet and cold fall, the notice warned us not to delay because there were limited quantities of usable pumpkins.

Now, that made our store manager stand up and pay attention because he knows that little old ladies coming into our store looking for pumpkin can get pretty nasty when our shelves are empty. In other words, since the supply might be lower, the demand will be greater, so he'd better order a bunch. However, since he knows people are going to be flocking in for pumpkin, and there might not be enough, you better believe he, and every other grocery store in our area, raised the price of pumpkin. Of course, this would be ridiculous to do in June since no one wants pumpkin pie in the summer. However, since we know that someone coming in on November 21st doesn't care how much it costs, they just want it; our market economy lets us get away with adding a few dimes to cans of pumpkin.

Command Economy

Opposite of the market economy that most of us are familiar with are state-controlled economies. A state-controlled economy is referred to as a command economy. In a command economy, the government, and not the free market, controls all economic activity.

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