Pure market economy: It is a market where buyers and sellers easily interact to sell and buy goods and services voluntarily. There is no interference from the government. In the real world, this kind of market does not exist instead a market-oriented economy commonly known as Capitalism is the ideal representation of this kind of market. There is an assurance of quality since the economy is consumer-centered and there is a high rate of competition among producers. Purchases are therefore determined by the customers' perception of quality. There is minimal wastage of resources (Farboodi et.al. 2017).
Centrally planned economy: In this kind of market, the government controls all the activities in the market including production, distribution and the use of resources. Companies owned by the state mostly undertake the production process. The government controls all the factors of production to achieve the best economic effect. The centrally planned economy tries to create equality by meeting the needs of everyone in the society (Farboodi et al. 2017).
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Scarcity and Choice
Scarcity means a limited distribution of goods and services while choice is a decision one makes in response to the scarcity of goods. In a free enterprise, most economic decisions in an open market are made entirely by the buyers and sellers. To adjust to scarcity of goods, producers increase the level of production. Highest bidders will always walk away with goods. Eventually prices of scarce good shoot up. Customers are free to make choices from a variety of goods in the market. They can find substitutes for the scarce goods (Grauwe, 2017).
In a centrally placed market, scarcity of a particular good will make the government set targets for each factory in the industry and allocate to them resources that may be needed for production. The state may decide to forego or suspend production of the less essential goods and to focus on the scarce goods. This decision will always have a negative consequence by limiting the choices of individuals since they will be denied their fundamental products. Black markets will have to be introduced to meet the needs of the few people within the economy. Black markets operate illegally by avoiding taxes and selling goods made illegal by the government. Their prices are also incredibly low. The government may decide to slightly raise prices of the scarce products as a way of bringing back demand to a lower level. Sometimes centrally placed markets fail to identify the shortages of good, surplus of products and consumer needs because the economy is centered on the national economic targets and not consumers (Grauwe, 2017).
The Price Mechanism
The free interaction between buyers and sellers in a free market economy facilitates price allocation to goods and services. The forces of supply and demand determine prices. When the resource is scarce, the demand is higher than supply driving the prices up. High prices discourage demand and lead to a conservation of resources. Price mechanism affects the quantity of goods produced. Price is also determined by the wages of most customers and their ability to purchase. Lower prices are set if the majority of the population are low-income earners (Singh, 2013).
In a centrally placed economy, the government introduces incentives to control prices of essential goods. The government itself can set exact prices of commodities. For vital goods and services that are expensive, the government takes care of all the production costs so that the pricing can be decrease to ensure that it is affordable to everyone. Maximum possible prices and the minimum reasonable prices are also determined. In such a system, there are higher chances of partial or complete private businesses having monopoly of production and sell of a certain good thus preventing free competition (Farboodi et al., 2017).
International Trade
International trade is the exchange of goods and services across borders of countries. Free markets are free to move and invest in different locations of their choices with no restrictions. Bilateral treaties are signed between countries to facilitate the trade. There is no control in the pricing and supply of foreign goods and operations depend on the natural interaction between suppliers and producers (Mankiw & Taylor, 2017).
In a centrally placed economy, free trade is regulated by the government through the imposition of taxes, customs duty, and business operation licenses. The trade is controlled through treaties and tariffs for a free-flow of goods in and outside the county. The government is keen on safeguarding local industries by minimizing cases of dumping and subsidies on foreign goods. Products to be imported and exported are determined by the government.
References
Mankiw, N. G., & Taylor, M. P. (2017). Economics .
De Grauwe, P. (2017). The limits of the market: The pendulum between government and capitalism .
Farboodi, M., Jarosch, G., & Shimer, R. (2017). The emergence of market structure . http://www.nber.org/papers/w23234 .
Singh, S. R. (2013). Macroeconomics . New Delhi, APH Pub. Corp.
