Answer to Question #215773 in Economics of Enterprise for Moha

Question

The concept of market mechanism can’t work under a command economic system. Explain this statement and then illustrate the perfect economic system which suits the market mechanism.

Answer 1

Solution:

This statement means that a market mechanism cannot work under a command economic system, which is an economy that is entirely controlled by the government.

In a command economy, the resources and businesses are owned by the government, which decides what goods and services will be produced and the prices that will be charged for them. The government also decides what production methods will be used, which quantities will be supplied and how much workers will be paid. Therefore, this is not possible in a market mechanism where the price and demand for goods and services are primarily determined by the buyers and sellers, which is based on the forces of demand and supply.

 

The perfect economic system which suits the market mechanism is capitalism.

In capitalism, resources and means of production are privately owned and operated for profit in a competitive market. The government has no role in the market economy and the ownership and profits are entirely owned by individuals. In capitalism, the supply and demand are dictated by the market forces and everyone works for themselves. Capitalism rewards the people that work hard and there is a large variety of goods which creates numerous options for consumers to fit their personal needs since the government has no control over the market, hence making it the perfect economic system for the market mechanism.