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Command and market economies | Basic economics concepts | AP Macroeconomics | Khan Academy - YouTube
Channel: Khan Academy
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in this video we're going to talk about
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different ways of structuring an economy
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in particular who owns what and how does
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an economy decide what to produce and
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who gets the the output of that
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production
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so on one side you have what's known as
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a command
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economy
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and good examples of command economies
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are the communist states especially
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during the 20th century the ussr the
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soviet union being the the best example
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of that
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and a command economy the government
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controls what's often known as the
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factors of production and sometimes in
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an extreme case there might not even be
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private ownership so let's say that this
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right over here is the government i'll
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do this with some type of a building
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with
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pillars in it so this is the government
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and in a command economy the government
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will often own the factories and the
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farms so the factors of production so
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let me draw a little factory here
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so a little smoke stack and so the
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government will tell this factory you
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this year you have to produce exactly 10
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000 cars no more and no less and so that
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factories say okay you're our boss
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you're the government we will produce
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exactly 10 000 cars
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similarly the government might tell some
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let's say that this right over here is a
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farm
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and
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this is my best drawing of a field
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really fast and so it needs to say hey
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you need to produce
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i don't know 10 million apples i don't
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even know if that's a reasonable amount
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of apples to produce but you need to
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produce 10 million apples and so the
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farmers who essentially work for the
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government because the government would
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own that farm they would produce those
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apples
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and also in a command economy there's
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like well who gets these cars and who
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gets these apples well in an extreme
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command economy they will be directly
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allocated by the government the
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government will say all right you get a
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car you get a car you get a car and it
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might not be based and in fact it will
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not likely be based on any type of who's
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willing to pay for the car or who could
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pay the most for the car similarly for
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the apples so they're all going to be
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allocated so there would have to be a
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lot of planning done on the part of the
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government to say okay how much should
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we produce of one thing versus another
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thing and how do we decide who gets the
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different things now the other side of
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the spectrum you have what's known as a
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market economy
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and most economies in the world
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especially the united states are much
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closer to being a market economy than
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being a command economy rather than
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having the government owning the factors
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of production and deciding who produces
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what and how much and who gets those
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things in a market economy it's all
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based on the factory
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right over here
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independent of the government for the
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most part unless you're in certain fact
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fields that might have strong influence
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from the government let's say you're a
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military contractor but if you're not in
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one of those fields if you're fairly
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independent of the government what they
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would say is well what does the market
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need they might say hey look the market
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needs 5000
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cars
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that look like this
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but then it also needs another 2000
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trucks
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that look like that
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and how are they basing it well they
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might have looked in the past year well
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how well is this car selling how well is
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the truck selling they might look at
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competitors in fact in a market economy
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you'll often have more competition
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the command economies you might have one
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really ginormous factory that's owned by
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the government or a few while here you
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might have competing factories where
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they're always hey they may they make a
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pretty good car we're going to make one
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that's just as good and it comes in
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yellow
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so once again you have this notion of
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competition for
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people to produce things out in the
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market and they're also making their
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best judgment of what does the market
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actually need similarly you could have
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your farmers here and you say hey you
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know what i've been growing a lot of
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apples but that doesn't seem to be in
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demand anymore so i'm going to grow more
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i don't know peaches because it looks
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like the sale of peaches the peaches are
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are in fashion this year and similarly
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who gets these is not
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dictated by the government it's
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determined by the market and so let's
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say this is me let's say this is you
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let's say this is someone else
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if i might not be interested in getting
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a truck but i really need to get a new
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car for my family so i can drive them
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around and take vacations and things and
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so and let's say you want to get a car
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too but the market will dictate who gets
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it so for example the factory might set
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a price for this car they might say it
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is ten thousand
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dollars per car
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and maybe i'm willing to pay it maybe
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i'm not maybe i'm like well i really
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like that blue car but i'm not willing
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to pay ten thousand dollars and this
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yellow car is available for nine
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thousand dollars so i am going to get
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that and the prices themselves won't
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necessarily be fixed if they're not
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selling enough of these cars at ten
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thousand dollars they might lower the
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price to compete with the yellow car at
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nine thousand dollars similarly if
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there's a ton of people who are willing
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to pay the price of this truck they
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might raise the price on the truck or
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produce more of it and the severe
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competition if one firm doesn't do this
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well on a regular basis they might go
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out of business so there's a strong
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motivation to be able to meet the needs
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of the market and then the prices adjust
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accordingly and so you might say well
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what are the
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the positives and negatives that people
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generally associate with command
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economies or market economies well the
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motivation that's often given for a
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command economy is some notion of
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fairness
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or some notion of equality that when you
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have an a market economy as a byproduct
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of this mechanism where different people
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are competing some people are innovating
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more or less
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some people might be working harder or
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less some people might just get luckier
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or unluckier you naturally will have
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some level of inequality
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and some of the original ideas behind
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command economies like communism where
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hey we don't like this inequality we
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want to see more fairness and so we want
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to see everyone get exactly the same car
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we want to see everyone get exactly the
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same number of apples we don't want to
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see all of these competing firms we want
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one really big efficient factory to just
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churn out these cars
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now it turns out in reality that's a
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little bit utopian
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even at the peak of some of these
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communist economies there were people
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who had better access to certain things
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people who might have carried favor with
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the leadership had more power who had
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had better apartments had better cars
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had more access to resources than people
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who didn't
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in a market economy yes there will be
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some inequality but the best thing going
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for it and the reason why most economies
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in the world even ones that are
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nominally communist like the chinese
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economy have transitioned to a market
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economy because a market economy is also
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associated with things like innovation
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and strong incentives for people
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to
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innovate or work or do things think
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about the situation in a command economy
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let's say that you're a manager at this
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factory here the government has told you
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to produce exactly ten thousand cars and
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exactly the type of model maybe you have
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an idea for how to make this car more
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efficient but no one's really going to
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reward you for that if you're not going
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to be able to get paid more so that you
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can buy more things you might not be as
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interested in doing it while in this
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situation you have extreme competition
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where as soon as this factory or this
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company is outselling this one everyone
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here is going to think wow we need to
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innovate we need to really work harder
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so that we can take more market share
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from the other company
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similarly at the individual level
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different people might say hey i can
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only afford the yellow car now but ig i
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really wish i had the blue car so maybe
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i'm going to work a little bit harder or
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i'm going to try to innovate or i'm
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going to try to start a business
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most of the world has transitioned to
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something much closer to a market
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economy because overall even though you
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have this inequality it has made more
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productivity more innovation more goods
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and services available to more people
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now the reality is is most economies as
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i mentioned they're close to a market
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economy but they aren't a perfect market
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economy
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you still have the government very
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involved in certain industries in many
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economies the government might be in
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control of health care the government in
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almost every country has significant
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influence in things like the military
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the government in say the united states
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which is considered a fairly capitalist
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a fairly strong market economy the
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government still does offer social
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safety nets when the inequality gets too
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extreme if someone isn't able to feed
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themselves they might get food stamps if
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someone isn't able to get health care
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because of poverty they might get
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medicaid and so there's actually a
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spectrum between a command economy and a
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market economy with most economies
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actually falling in this in-between
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state which is sometimes referred to as
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a
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mixed economy
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for example as already mentioned the
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united states which is considered a very
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capitalist country with a market economy
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it still does have some public ownership
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the government still does control
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certain aspects of the economy it still
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represents a fairly large chunk of the
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economy and so a pure command economy
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government would control everything pure
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market economy you would have very
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little that's controlled by the
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government but the reality in most of
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the world things fall in this mixed
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economy spectrum
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