24 Unit 1 The Economic System
producers meet to exchange goods, services, and money. The term market
may refer to all goods and services in an economy or to a limited number
of goods in a selected segment. For example, there is a market for children’s
clothes, for luxury cars, and for electronics. There also is a global market
that encompasses trade among all the nations of the world.
Command
A command economy is a system in which a central authority, usu-
ally the government, controls economic activities. A central authority
decides how to allocate resources. It decides who will produce what. It
decides what and how much to produce and sets the prices of goods and
services.
In this type of system, the needs and wants of consumers are not gen-
erally a driving force in the decision-making process. Consumers do not
have broad freedom of choice. They often cannot decide for themselves
how to earn and spend income. A command economy often exists in
socialist and communist forms of government.
Case Study: Living in a Market Economy
Anita and Juan Search for Housing
Anita and Juan are in their mid-twenties and plan to marry in six months.
They decide to buy their fi rst home in the city and move to the suburbs once
they have school-age children. They see two new one-bedroom apartments in
their price range, but prefer a higher-priced loft apartment. The loft is a little
over their spending limit, but the high ceilings, wood fl oors, and interesting
fl oor plans tempt them. The units also have new kitchens and laundry
equipment. Their real estate agent says the loft should have an excellent
resale value when they decide to sell and move in a few years.
Case Review
1. How are housing costs determined in a market economy? Why are they
likely to be higher than in a command economy?
2. What would happen to housing costs in a market economy when the
supply is severely limited? How would prices change when there are more
sellers than buyers?
3. How do you see the supply and demand for housing in your area? Would
you rather be a buyer or a seller?