Command and market economies | Basic economics concepts | AP Macroeconomics | Khan Academy
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Command and market economies | Basic economics concepts | AP Macroeconomics | Khan Academy


– [Instructor] In this
video we’re gonna talk about different ways of structuring an economy. In particular, who owns what and how does an economy
decide what to produce and who gets the output
of that production. So on one side, you have what’s
known as a command economy and good examples of command economies are the communist states, especially during the 20th century, The USSR, the Soviet Union
being the best example of that. In a command economy,
the government controls what’s often known as
the factors of production and sometimes, in an extreme case, there might not even be private ownership. So lets say that this right
over here is the government. I’ll do this with some type of a building with pillars in it. So this is the government. And in a command economy, the government will often own
the factories and the farms, so the factors of production. So let me draw a little factory here. So with a little smoke stack… And so the government
will tell this factory, “This year, you have to
produce exactly 10,000 cars,” “No more and no less.” and so that factory say, “Okay, you’re our boss,
you’re the government.” “We will produce exactly 10,000 cars.” Similarly, the government might tell some, let’s say that this right
over here is a farm, and this is my best drawing
of a field really fast, and so it needs to say
“Hey, you need to produce”, I don’t know, “10,000,000 apples,” I don’t even know if that’s a reasonable
amount of apples to produce but you need to produce 10,000,000 apples. And so the farmers who essentially
work for the government, ’cause the government would own that farm, they would produce those apples. And also in a command
economy, there’s like well who gets these cars
and who gets these apples? Well, in an extreme command economy, they will be directly
allocated by the government. The government will say, “Alright, you get a car, you
get a car, you get a car.” and it might not be based, and in fact it will not likely be based on any type who’s willing
to pay for the car or who could pay the most for the car. Similarly, for the apples. So they are all gonna be allocated. So there will have to be
a lot of planning done on the part of the government to say, “Okay, how much should
we produce of one thing” “versus another thing
and how do we decide” “who gets the different things?”. Now the other side of the spectrum, you have what’s known as a market economy. And most economies in the world, especially the United
States, are much closer to being a market economy
than being a command economy. Rather than having the government owning the factors of production,
deciding who produces what and how much and who gets those things, in a market economy, it’s
all based on the factory right over here, independent
of the government for the most part unless
you’re in certain fields that might have strong
influence from the government, let’s say you’re a military contractor. But if you’re not in one of those fields, if you’re fairly independent
of the government, what they would say is, “Well, what does the market need?” they might say, “Hey look,
the market needs 5,000 cars” “That look like this
but then it also needs” “another 2,000 trucks
that look like that.” and how are they basing it? Well, they might have looked in the past or how well is this car selling, how well is the truck selling. They might look at competitors, in fact in a market economy, you’ll often have more competition. The command economies, you might have one
really ginormous factory that’s owned by the government or a few while here you might
have competing factories where they’re always “Hey make a pretty good
car, we’re gonna make one” “that’s just as good
and it comes in yellow.” So once again, you have
this notion of competition for people to produce
things out in the market and they’re also making
their best judgment of what does the market actually need. Similarly, you could have
your farmers here and you say, “Hey, you know what?” “I’ve been growing a lot of apples” “but that doesn’t seem
to be in demand anymore” “so I’m going to grow more,
I don’t know, peaches” “’cause it looks like the sale of peaches” “are in fashion this year.” and similarly, who gets these is not dictated by the government, it’s determined by the market. And so let’s say this is
me, let’s say this is you, let’s say this is someone else. If I might not be interested
in getting a truck but I really need to get
a new car for my family so I can drive them around
and take vacations and things, and so let’s say you wanna get a car too but the market will dictate who gets it. So for example, the factory
might set a prize for this car, they might say it is
10,000 dollars per car and maybe I’m willing to
pay it, maybe I’m not. Maybe I’m just like “Well I
really like that blue car” “but I’m not willing
to pay 10,000 dollars” “and this yellow car is
available for 9,000 dollars” “so I’m going to get that.” and the prices themselves
won’t necessarily be fixed. If they’re not selling
enough of these cars at 10,000 dollars, they
might lower the price to compete with the yellow
car at 9,000 dollars. Similarly, if there’s a ton of people who are willing to pay
the price of this truck, they might raise the price on the truck or produce more of it. In this severe competition, if one firm doesn’t do this
well on a regular basis, they might go out of business. So there’s a strong motivation to be able to meet the needs of the market and then the prices adjust accordingly. And so you might say, “well what are the
positives and negatives” “that people generally associate” “with command economies
or market economies?”. Well, the motivation that’s often given for a command economy is
some notion of fairness or some notion of equality that when you have a market economy, as a byproduct of this mechanism where different people are competing, some people are innovating more or less, some people might be
working harder or less, some people might just
get luckier or unluckier, you naturally will have
some level of inequality. And some of the original
ideas behind command economies like communism where hey we
don’t like this inequality, we wanna see more fairness. And so we wanna see everyone
get exactly the same car. We wanna see everyone get exactly
the same number of apples. We don’t wanna see all
of these competing firms, we want one really big, efficient factory to just churn out these cars. Now it turns out in reality, that’s a little bit utopian. Even at the peak of some of
these communist economies, there were people who had
better access to certain things. People who might have carried
favor with the leadership, had more power, who had better
apartments, better cars, had more access to resources
and people who didn’t. In a market economy, yes, there will be some inequality, but the best thing going for it, and the reason why most
economies in the world, even ones that are nominally communist like the Chinese economy, have transitioned to a market economy because a market economy
is also associated with things like innovation and strong incentives for people to innovate or work or do things. Think about the situation
in a command economy. Let’s say that you’re a
manager at this factory here. The government told you to
produce exactly 10,000 cars and exactly the type of model, maybe you have an idea for how to make this car more efficient, but no one is really
gonna reward you for that. If you’re not gonna be
able to get paid more so that you can buy more things, you might not be as
interested in doing it. While in this situation, you have extreme competition where as soon as this
factory or this company is outselling this one, everyone here is gonna think
“Wow, we need to innovate.” “We need to really work harder” “so that we can take more market share” “from the other company.” Similarly, at the individual level, different people might say “Hey, I can only afford
the yellow car now” “but gee, I really wish
I had the blue car” “so maybe I’m gonna work
a little bit harder” “or I’m gonna try to innovate” “or I’m gonna try to start a business.” most of the world has
transitioned to something much closer to a market
economy because overall, even though you have this inequality, it has made more
productivity, more innovation, more goods and services
available to more people. Now the reality is most
economies, as I mentioned, they’re close to a market economy, but aren’t a perfect market economy. You still have the
government very involved in certain industries. In many economies, the government might be
in control of healthcare. The government in almost every country has significant influence
in things like the military. The government, in say the United States which is considered a fairly capitalist, a fairly strong market economy, the government still does
offer social safety nets when the inequality gets too extreme. If someone isn’t able to feed themselves, they might get food stamps. If someone isn’t able to get
healthcare because of poverty, they might get Medicaid. And so there’s actually a spectrum between a command economy
and a market economy. With most economies
actually falling in this inbetween state which
is sometimes referred to as a mixed economy. For example, as I already mentioned, the United States which is considered a very capitalist country
with a market economy, it still does have some public ownership. The government still does
control certain aspects of the economy, it still represents a fairly large chunk of the economy. And so a pure command economy government would control everything, pure market economy, you
would have very little that’s controlled by the government, but the reality in most of the world, things fall in this
mixed economy spectrum.

About Ralph Robinson

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27 thoughts on “Command and market economies | Basic economics concepts | AP Macroeconomics | Khan Academy

  1. What about Islamic Economy ??
    Where you're allowed to get rich, but you have to donate certain part of your wealth for charity annually.

  2. Why hasn’t this video attracted more views? It’s one of the best explanations and descriptions on the topic I’ve seen.

  3. If everyone had a say in government and the government is run by the people, the people would decide who got what. It wouldn't be like this overlord telling everyone. It would be the people saying in this area the demand for that is about this % we need to distribute out enough for the people in that area. And since the government is the people, they would always look out for all peoples interest, not tainted by profit or gain, but looking to give what everyone needed. That is if the government is actually run by the people. It would be better though if you had local statisticians working out what is needed and what people want in that area, and working out if it can be done. This would all be about the best interest of the people. It would not be about setting up those in government with power as I said the government should be run by all people. But that is my view point. It would be about people working for the people, in which the government would just be a building in which all people decided what is for the best.

  4. Once technology advances enough, a car could become a representation of any design a person wants. Imagine a profile page with it's own style, when you get in a car you could have it looking like your own personal style. But even then a car isn't really about making a statement, it's about getting from a to b. But the point of styling is to keep the world interesting. Never a dull moment. We should be working on technology that can be the style a person wants on demand. This would not affect the hardware or software. Imagine lego blocks with motors, on a tiny scale. That can be formed in a pattern we like. The style we choose would be up to us. Now with vehicles it could just be the windows styles and so on. How much it can change would depend on how much that hindered the practicality of that object. So people would have the freedom of style without having to pay for a completely new object.

    Long term even the hardware could be recycled and turned in to a better version of it's self. More efficient, by taking the materials used and reforming them, and melting the metals individually and reshaping them. With software updates this already happens all the time.

    Point being if everything was working as a collective and sharing new updates, then the world would progress in a way that every human got the latest and best technology. Given sometimes new materials would be needed, but that would be the only time in which a person would need something new. The rest of the time 3d printers and methods would be available in which everyone could have any design they wanted, and then select how it is to look or even hoe stringy and soft something is. This could be done with layering. Like how fabric is woven. But point being the aim would be to allow everyone to have something by creating a device which could re-make the part made. Kind of like how the human body heals it's self, but instead it could break it's self down and build in to a totally new style and feel.

  5. 7:27 Do you suppose that Isaac Newton or Rosalind Franklin or Clara Rockmore had dollar signs in their eyes when they were devoting all of their free time to their special interests? Do you really believe that people are better motivated by the desire to amass wealth than they are by curiosity, necessity, and/or social recognition of their achievements? I really don't think so.

  6. Great video for a high level intro of an economy (Pure Command versus Pure Market), of which does not naturally exist anywhere in the world (hence the final mention of a Mixed economy). An economy asks these 3 basic questions: 1)Who decides what goods and services are needed? 2)Who decides how those goods and services are produced and 3) Who decides how the goods and services are distributed? Based on the answers, you land in the more specific economic system discussions of Communism v Socialism v Capitalism, of which all have a range or mixed variations.

  7. Command economy/planned economy is better for my country.
    Ever since we adopted a market economy, prices increase and wages decrease

  8. The incentive to improve cars in a command economy is that there is less environmental damage, faster transport of goods and workers, etc. Everything functions more efficiently. A command economy government would be wise to invest in R&D.

  9. Difference between poverty and inequality. If no one was starving or unable to work in a market economy, the US wouldn't have those social safety nets, even if the inequality was bigger than it currently is. If everyone was richer, but the rich were richerer, there'd be no social safety nets, so it's a little inaccurate to say that the US has such systems due to extreme inequality.

  10. This is a poor explanation of socialism. I would suggest actually studying how the USSR and Mao’s China functioned if that’s what you came here for

  11. The Soviet Union is actually a bad example of command economies, since they were forced to transition from market to command economies, and existed in a globalised world were market economies were the norm. They they never worked properly, and failed. Better examples of command economies are the monarchies of the ancient world, notably the Hittites, the Assyrians, and most importantly, Ancient Egypt. This highly organised command economy lasted for thousands of years, international trade flourished, and made Egypt the wealthiest and most powerful civilisation of the ancient world before the Bronze Age Collapse.

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