Which economic system makes decisions about what to produce based on the governments preferences?

A market economy is an economic system where two forces, known as supply and demand, direct the production of goods and services. Market economies are not controlled by a central authority (like a government) and are instead based on voluntary exchange.

Market economies rely on the interplay between supply and demand to function. “Demand” refers to the amount of goods and services people need or want. “Supply” refers to the amount of goods and services available for purchase. If the supply is low while the demand is high, it drives up the price that someone can charge for it. Conversely, if there is a greater supply of a certain good and people do not want it as much, the price will go down. The levels of supply and demand for any given good or service tend to move toward an equal balance—but this equality, if achieved, cannot be held for long, so the tension between supply and demand creates a fluctuating market.

Market economies have other characteristics as well. The concept of private property is central to the market economy, because it gives owners the right to sell their goods. Competition is also an important factor, because it affects supply and demand. When there is more than one seller of a particular good, competition to make a sale can drive down the cost of that good—and the buyer has a choice of where to shop, which gives them additional leverage they would not otherwise have.

Market economies evolved from traditional economies where people bartered for goods and services, and did not have a currency. As the concepts of money, voluntary exchange, and individual property rights developed, market economies arose as one of three modern economic systems. Another modern economic system is the command economy, where the government controls all economic decisions, in sharp contrast to the market economy. The government sets the price for goods and services and controls the means of production. The other modern economic system is a mixed economy, which has characteristics of both a market economy and a command economy.

Market economies are tied to capitalism, an economic system where private entities or people own the means of production. Capitalism needs the forces of supply and demand in the market economy to distribute goods and services and set prices. Conversely, command economies are tied to socialism and communism, where the collective group owns the means of production. Most countries today, including the United States, have a mixed economy with elements of both market and command economies.

Determining Ways That Scarcity Affects the Choices Made by Governments and Individuals

Scarcity and governments: different economic choices require different economic systems

Making economic choices is another way of dealing with scarcity. The different ways nations make economic choices result in various economic systems. All nations must address the problems of resource scarcity, and all nations must allocate their limited resources to meet the needs of their citizens. When nations allocate resources, they make choices reflecting their basic human values. They also answer the three basic economic questions of what to produce, how to achieve this production, and for whom this production is intended. In other words: What goods and services will we as a society produce? How will we do this? Who will receive these goods and services? As you will see below, traditional economies, market and mixed market enconomies, and command economies answer these questions differently.

Economic systems can be divided into three types: traditional, market, and command (or planned) systems. The traditional economic system is based on traditional practices of subsistence agriculture, fishing, or hunting and gathering (or a combination of those pursuits), and may use barter as a method of exchanging goods. In a traditional economy, a person's economic role is likely to be the same as that of their parents and grandparents. Economic decisions involving production are likely to be based on tradition; families produce what they need, and may use excess production to trade. An example of traditional economies would be the majority of pre-Columbian societies in the Americas.

A market economic system may be a pure market economy or a mixed market economy. In both of these systems, buyers and sellers are the primary controllers of the marketplace. In the first-mentioned system, consumers' buying decisions determine what will be produced in a system in which businesses are free to operate as they wish in order to make a profit, setting prices in competition with other producers. Consumers are free to purchase what they wish at prices set by this competition between producers.

A mixed market economy combines elements of the above with command (or planned) economies. In a mixed economic system, most economic decisions are made by consumers or sellers, but some economic decisions are made by the government, such as those dealing with safety regulations, infrastructure (e.g., roads), education, military spending, and certification and business licensing, all of these being decisions which affect the economy in some way. The United States and the United Kingdom are two such mixed market economies.

In planned (or command) economies, economic decisions—what is produced and how resources are allocated—are made by the government or the state. Production is regulated and economic activities are coordinated via government directives, targets, and regulation. Some forms of a command economic system featured in the former Soviet Union, briefly in Nazi Germany, and temporarily in the wartime administration of some economies (including that of the United States during World War II).

The above systems usually indicate the types of governments identified with them. If the government owns and operates all of the nation's means of production (such as in China prior to the late 1970s) then the political/economic system is generally based on communism. If the government owns and operates the nation's major industries and utilities, but permits individuals to own smaller businesses, then the political/economic system is generally based on socialism (Lithuania, socialist under the former USSR, is presently reforming its state-owned enterprises). Finally, if almost all stores, factories, and farms are owned and operated by private individuals, then the political/economic system is generally based on free enterprise and democracy.

Institutions in market and command economies

Institutions operate differently and perform different functions in market and command economies.

In command economies, and especially in pure command economies, banks and the manufacturing sector fit into a central economic plan devised by the national government. This central plan drives regulations on business, which operate as virtual monopolies. The usual economic interplay between supply and demand is therefore erased, since prices are set and production is controlled according to this plan. It is difficult in planned economies to "to align the production and distribution of goods and productive factors with consumer preferences and the real scarcity of resources" (Chappelo, 2019). Read more on the place of institutions within command economies at the link below.

https://www.investopedia.com/terms/c/command-economy.asp

In market economies, institutions such corporations operate independently of the government and pursue their own goals, with some government oversight. Corporations in a market economy can respond to consumer demand and seek growth and profit as they see fit—in line with whatever government regulation exists; for example, regulations to ensure worker safety and prevent environmental pollution. Corporations can be private or go public and sell shares in their company, through the stock market, another pillar of market economies. Stock markets operate as a "collection of markets and exchanges where regular activities of buying, selling, and issuance of shares of publicly-held companies take place" (Chen, 2019) which. "provide[s] a secure and regulated environment" for people to invest money. The stock market also provides access to financial data as well as a mechanism for secure, valid transactions for buyers and sellers.

An important factor in market economies' economic stability is the central bank. Central banks function as the bank of the national government (although they generally operate outside governmental politics). They regulate money supply by issuing currency such as bank notes and cash and raising or lowering interest rates. They regulate member banks such as savings and loan banks by setting the capital and reserve requirements for such banks. They also can operate as lender of last resort to other financial institutions and even governments (Segal, 2019).

Finally, although governments in market economies do not drive national economies the way governments in command economies do, they perform four important functions in market economies. Learn what these functions are at the link below.

http://www.economicsdiscussion.net/government/role-of-the-government-in-a-market-economy-economics/26174

Which economic system makes decisions about what to produce based on the government's preferences?

Which type of economic system does the government make all decisions?

What type of economic system allows individuals to decide what to produce?

What is an economic system where the decisions on what to produce and what to consume are made by individuals and businesses in the market?