(a) What is centrally planned economy? (b) Outline any four features of a capitalist economy.

Answer Details

(a) A centrally planned economy (also called a command or socialist economy) is an economic system in which the means of production are owned and controlled by the state, and a central planning authority takes the major economic decisions of what to produce, how to produce and for whom to produce. Prices, output and the allocation of resources are directed by the government rather than by the free interplay of demand and supply.

(b) Four features of a capitalist economy:

• Private ownership of property: Individuals and firms own and control the means of production such as land and capital.
• Profit motive: Production and investment are driven by the desire of private owners to make maximum profit.
• Freedom of enterprise and choice: Producers are free to produce any lawful good, and consumers are free to buy what they can afford; consumer sovereignty guides production.
• Price mechanism (market forces): Prices are determined by the free interplay of demand and supply, and they allocate resources with minimal government interference. (Competition among many buyers and sellers is a further feature.)