In a market economy, decisions on how resources are to be allocated are usually taken by millions of households and thousands of firms ÃÂ the exact number depends on the size of the economy. They interact as buyers and sellers in the market for goods and services. The government has a very restricted part to play. However, in a Command economy the government has a central role in all decisions that are made and unlike the market economy, the emphasis is on centralization. Decision making is taken by central planning boards and organizations to enterprises that are state-owned or under state regulation and control. Whereas in a market economy consumer sovereignty influences resource allocation, in a command economy it is central planners who have to determine the collective preferences of consumers and manufacturing enterprises.
In a market economy, prices and the operation of the price system underpin this interaction; in turn prices act to indicate the likely market value or particular resources.
For example, a commodity in short supply but which has a high demand attached to it will have a high price. Alternatively, one which has a high supply and low demand will have a much lower price attached to it. Prices and the self-interest of people and businesses therefore act as a guide to the decisions that have to be taken. The self interest which drives suppliers to allocate resources is called the ÃÂinvisible handÃÂ. This invisible hand brings together private and social interests in a harmonious way: this is the fundamental philosophy underpinning the workings of the market economy.
Central planning tends to set numerous goals for the economy that differ from those in a market economy. In a command economy, the scarce resource of human labour in employment is generally greater...