World Geography
Introduction to Economics: A Brief Overview of Command & Market Economies
The word economy is difficult to define. The economy of a nation refers to the products and services its citizens want, need and produce (Does the country make cars, computer software, do the people buy laptops, MP3 players). The word economy also refers to the ways that people exchange those goods and services (Do people use money to purchase products, do they trade goods). Lastly, economies illustrate the way in which wealth is distributed in a country (How many people are rich, how many people are middle class, how many people are poor). People have different opinions over how the economy of a nation should be run. The three most common economics systems are: capitalism, communism & socialism.
CAPITALISM
Capitalism is an economic system based on the idea of private ownership of the production and distribution of a country’s goods. This means that the citizens of a capitalist country own the factories and natural resources. The citizens have a lot of power over the economy. Capitalists favor the “free enterprise system”. According to the free enterprise system, the government should not interfere with the economy at all. The people should run the economy without any assistance from the government. Capitalism is driven by the laws of supply and demand.
Supply: the amount of products that a business is willing and able to produce
Demand: the number of products that consumers are willing to buy at a certain price
Basic Law of Supply & Demand
When the demand for a product is high and the supply of that product is low, the price of that product will rise. For example, many people may want an autographed copy of the New Moon script, but there are only a few copies available. If a store has an autographed copy, they can sell it for a higher price, because the demand for them is high.
When the demand for a product is low, but the supply is high, the price of the product will drop. For example, a store has 500 copies of the last Harry Potter book, but no one wants to buy it anymore. The store will lower in the price in hopes of getting people to buy the book.
Capitalism is characterized by competition. Businesses will compete with one another for customers. They compete by making higher quality products and keeping their prices low to attract customers. Buyers will seek out the best possible deal their money can buy (highest quality product at that lowest price). Therefore, the government (in theory) does not need to take an active role in economy (because the citizens are in control).
SOCIALISM
Socialism is an economic theory that states the government should be in charge of the economic planning, production and distribution of goods. The government decides how much of a product will be produced, where the product will be sold and how much the products will cost consumers. The government is not in control of all businesses – just the ones it deems most important (energy production, health care, education, transportation, etc…). The government provides people with many of these services (i.e. college and healthcare are free and available to all citizens), but in order to provide these services to all citizens, socialist governments have very high tax rates.
The system of socialism favors cooperation over competition. Instead of having businesses compete with one another to create and sell the best products at the lowest prices, the government helps businesses work together to create the best products at the lowest prices. Citizens do own private property in socialist countries, but the government has a lot of control.
COMMUNISM
Communism is an economic theory developed by a man named Karl Marx. Communism is based on an idea that all aspects of an economy should be controlled and owned by the government. In theory, no one would own private property in a communist country; all of the county’s resources would be owned collectively by the communist government. The government then determines how all of the resources will be used.
Communism was designed to eliminate different social classes based on wealth. In theory, the government is to distribute the resources of a nation evenly so that no one person would have more economic wealth than another person. Therefore there would be no rich or poor people – there would be economic equality.
Unlike capitalism, a communist economy is not driven by the laws of supply and demand. The government decides which goods will be produced, who will produce them, how they will be distributed and how much those goods will cost. While the theory of communism may seem to have benefits (i.e. the elimination of poverty), when practiced in reality, communism has failed many times. In the 1950s, many nations in Asia & Latin America adopted communist economies. Since then, most of those economies have failed due to inefficiency and the greed of communist dictators. Today few communist countries exist (Cuba, China, Vietnam, North Korea).