VIDEO: Difference Between Planned Economy and Market Economy

The market economy - a free system

In the market economy - which is usually referred to as the free market economy - the supply of Goods determined by the producers themselves, whereby these are based on consumer demand orientate. There is no central control, rather the offer and the prices are determined by the market participants themselves. The system is largely self-regulating, which means that neither the supply of goods nor the pricing is interfered with.

The planned economy - a centrally controlled system

The planned economy - better known as the central administration economy - is a system in which, in contrast to the market economy, a central body regulates all aspects of the market. It determines which goods are produced where by whom, and it determines the price at which the goods produced are to be sold on which market. Most of the former communist countries like the former USSR had a more or less strict central administration economy.

Differences between a market economy and a planned economy

• Differences in pricing
  In the market economy, the price is regulated by supply and demand. If the demand is high, the prices can quickly rise sharply. In the case of important goods, such as food, however, this means that the state must intervene and order price regulation so that the citizens can continue to be supplied.
  In the planned economy, the prices are set centrally. In this way, the state can guarantee that all citizens can purchase important goods at the same price and that exorbitant prices are excluded.
• Differences in the structure of the offer
  The market economy aligns its offer with the wishes of the consumers and offers them the goods they demand. In the planned economy, the central body again determines which goods are offered and produced. This can lead to the state deliberately withholding coveted goods from its citizens for political reasons.