In the modern world, few nations are purely market-based or purely command-based. Most lean toward one of these models.
Market-Based Economies
Market-based economies allow people and businesses to exchange goods and services freely based on supply and demand.
The United States is mainly a market economy. Producers decide what to sell and produce and set prices. If they want to succeed, they need to provide what consumers want and charge what consumers are ready to pay.
Through these choices, supply and demand influence prices and total production. If consumer demand for a specific product rises, production usually increases to meet that demand. The higher demand pushes prices up until consumers hesitate and reduce their purchases. Then, demand for the product will drop, and prices will go down as well.
This ongoing push and pull of supply and demand helps a market economy balance itself naturally. As prices in one area rise due to demand, money and labor move to where they are needed most.
Command-Based Economies
Command-based economies rely on a central government to control production levels, pricing, and distribution of goods. A command-based economy tries to override the normal workings of supply and demand.
In this system, the government owns industries that are essential for consumers. Competition between companies is discouraged or prohibited. Prices are fixed.
Communism needs a command-based economy. Modern examples include Cuba and North Korea.
Mixed Economies
Pure market economies are rare today since there is usually some level of government involvement or central planning. Even the United States could be seen as a mixed economy. It does not require production, but it has ways to influence it. For example:
In late 2021, President Joe Biden ordered the release of 50 million gallons of oil from the Strategic Petroleum Reserve to try to lower gasoline prices by increasing supply.
In 2022 and 2023, the Federal Reserve raised interest rates several times for banks. The goal was to increase interest rates across the economy to decrease demand for loans and, in turn, lower inflation in the costs of goods and services.
In reality, most of the world’s developed economies blend market-based and command-based approaches.
China had a command economy until 1978 when it started reforms that encouraged private business.
World Bank. “The World Bank in China.“