Organisation of Economic Activities

Economic activity has a role in almost every aspect of our daily lives, whether we realise it or not. Some people are involved in the production, while others are involved in consuming and in possession of the manufactured items and trade. This article explains the two ways in which economic activities are organised—the centrally planned economy and the market economy. To help explain the types better, we also study the difference between the planned and market economies.

What is the organisation of economic activities? 

The market is the central organising principle of all economic endeavours. A market is an organisation that facilitates the free exchange of goods and services between people who are engaged in different economic activities, such as farming or manufacturing. In order to arrive at a price for the products and services, the customers and sellers must reach a consensus.

When it comes to the organisation of economic activity, fundamental concerns may be handled by the free interaction of people pursuing their own goals, as occurs in the market, or through the organisation of economic activities by some central authorities, such as the government.

Classification of organisation of economic activities

The organisation of economic activities is classified into two types:

• Centrally planned economy 
• Market economy

Centrally planned economy

Centrally planned economies are economic systems in which a centralised authority, such as a government, makes economic choices affecting the manufacture and distribution of goods and services. The centrally planned economy varies from the market economy, in which such choices are usually made by firms and customers rather than by the government.

State-owned enterprises (SOEs), or government-owned corporations, are often used in command economies to manufacture commodities and provide services to the population. Bureaucrats regulate prices in the centrally planned economy, which is also known as ‘command economy’ in certain sectors.

Advantages of a centrally planned economy

Some advantages of the centrally planned economy are discussed below.

Prices are maintained

Under a centrally planned economy, prices are maintained in check. In a centrally planned economy, the government has the power to set prices for the whole population without regard to supply and demand. As a result, it is easier to set prices such that the majority of consumers can afford to purchase the goods they need. It is believed that if everyone has access to the necessities of life, class hierarchies will no longer exist, which is a step toward an equal society.

Fair and equal opportunities for all

In a centrally planned economy, everyone has an equal opportunity to follow their aspirations and people’s ability to make decisions about employment, products, and housing is removed. The majority of centrally planned systems compensate families for their labour in part by giving them a place to call home. A person may not be able to choose where they live, but it is an expense that is not deducted from their income. With this system, it’s all about using your unique skills and abilities to contribute to a more prosperous and more united country.

Market economy

A market economy is a financial framework in which the economic choices and pricing policies of products and services are completely dictated by the interactions of a nation’s people and legal organisations. Neither the government nor central planning is deeply involved in this process.

Many economic decisions are made via free-market exchanges in which prices are determined by the forces of supply and demand. By developing outputs that are worth more than the inputs they use, entrepreneurs have the flexibility to seek profit. Economists generally agree that market-oriented economies provide superior economic results. Still, they dispute the exact equilibrium between marketplaces and central planning that is optimum for a country’s long-term welfare.

Advantages of a market economy

The advantages of a market economy are discussed below.

Effectiveness in the workplace

In contrast to other economic systems, a market economy boosts the productivity of enterprises. Greater efficiency and more free and enhanced competition may be achieved when governments play a smaller and more restricted role. When there is a lot of competition, businesses seek to cut expenses and raise sales in order to make more money.

A strategic edge

Economies that are based on the free market are more innovative. In an effort to boost profits, companies and people alike are constantly developing new goods and technology. In a market economy, businesses and individuals are encouraged to innovate in order to gain an edge over their rivals.

Consumers benefit from reduced pricing and higher quality items as a result of competition between businesses. As a result, they are able to improve the product’s manufacturing and the quality of the service.

Conclusion 

Planned and market economies have similar goals, but the method in which economic activity is carried out in the economy makes a distinction between the two. A centrally planned economy is an economic system that has been planned and structured by a government agency. Economies that are centralised and predetermined do not allow for individual choices to be made by the market. There is no demand and supply in a market economy. The choices are made based on the free-market forces. Pure market economies do not exist in the modern world.