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Organization of economic activities
What is an Organization of Economic Activities?
All economic activities in an economy occur in the market. A market is a central organization through which all economic activities take place. Markets enable free economic transactions of individuals who have their own economic aims or goals. The prices of goods and services are reached by the consensus between buyers and sellers.
The market acts as an agent that lets people with different goals freely interact with one another. This interaction also includes the consensus that is reached between two parties regarding the price of a good or service. Goods are sold depending on this consensus among the two parties - the sellers or manufacturers and the buyers or customers.
Another notable aspect in the case of the organization of economic activities is that the fundamental concerns related to exchange may be handled by the people taking part in an exchange. In other cases, the government may act as the agent to settle the commitments of each party involved in a transaction.
The notable feature is important for an economy. Without a middle man when consensus is not obtained, the exchange process may get stalled. Therefore, the government’s role in exchange is quite impressive. Even if many of the consensuses can be reached without government help, in the case of a need for a third party to mediate the consensus, the government is considered the safest and the most trusted third party.
Please also note that the government is an independent agency without a profit motive. Its only role is to mediate and bring a consensus to the table when there is a mismatch regarding the attributes and prices of commodities in the market.
Classification of Organization of Economic Activities
The classification of organization of economic activities can be of two types −
- Centrally Planned economy, and
- Market economy
Centrally Planned Economy
The centrally planned economy, as the name suggests, is an economic system where the choices for economic processes of manufacturing and distribution are controlled by a central authority, such as the government.
In other words, the economy that is planned and controlled by governments is a centrally planned economy.
The most common examples of centrally planned economies can be found in state-owned enterprises and government-owned corporations in command economies. These units of command economies are often used to manufacture commodities and provide services to the population or members of the economy.
Advantages of Centrally Planned Economy
- Price is maintained − In a centrally planned economy, the prices of goods and commodities are set by the government. In such cases, the prices are not governed by the demand and supply equations of the market. This price settlement is done with the aim to provide the basic necessities of life to all people in the economy. It is believed that if everyone can access the necessities of life, class hierarchies will be non-existent which will improve the conditions of society.
- Fair and equal opportunities − A centrally planned economy offers equal help to all members of the economy. In such economies, the members of the economy can have their own aspirations but the requirements for searching for employment, products, and housing is removed by the government. So, the hard work of the people is compensated by providing them the most important amenities in life equally among all members of the community. So, people may contribute more to building a more prosperous and peaceful society.
A market economy depends more on the supply and demand in the market for products manufacturing and distribution. The government does not intervene in the process of exchange of goods, therefore, the prices of the goods and commodities in the market are determined by people and legal organizations.
In a market economy, most economic decisions are made via free market exchanges. Entrepreneurs in the market economy seek to earn profits by selling outputs at prices higher than inputs. Some economists argue that market economies offer better results than centrally planned economies. However, most people agree that a balance between a free market and a centrally planned economy is the best for societies.
Advantages of Market Economies
- More competition leads to better quality − Organizations in a market economy tend to bear more competition. In order to stay profitable and acquire market share, they reduce prices and build goods of better quality. So, in a market economy, the availability of high-quality products and effectiveness is more than in a centrally planned economy.
- Effectiveness in the workplace − As the role of government is limited in market economies, organizations seek to cut costs and raise sales. In this process, organizations become more effective. More effective organizations are more flexible in offering products at lower prices. So, in a market economy, prices are always at lower levels due to the effectiveness of the organizations.
It is obvious that the ultimate goals of a centrally planned and market economy are the same, but the ways to reach the pursuits are different. Centrally planned authorities are less flexible in nature as supply and demand do not play any role in them. The prices of goods are predetermined and consumers have to buy products that are limited in number.
However, in a market economy, there are more choices for consumers. They can select the items from a range of samples and hence, there is more innovation to lure them into the market economy.
The way markets or economies are organized makes a big impact on the day-to-day lives of individuals. While centrally planned economies are considered better because they establish more equality and balance in the system, market economies are better at innovating and creating better products for consumers.
The market is at a central position in the theory of the organization of economic activities. It makes sense. As all the transactions of necessary items for a living are accessed by consumers from the markets, the markets deserve the focus bestowed upon them by economists. Studying the phenomena related to markets is both essential and productive in the long run.
The idea of the organization of economic activities is central to economics studies. It helps to identify the pattern of markets and act depending on the patterns. Although finding purely market-based economies are hard, almost all countries in the world now have a tendency to adopt market-based economies.
However, a certain amount of government control can make the system free from various economic vulnerabilities. Therefore, a system that is a mix of centrally planned and market-based economies should be the ideal choice.
Q1. Why are markets important in terms of the organization of economic activities?
Ans. Markets are important in terms of the organization of economic activities because all economic aims and goals are organized through the market.
Q2. What are the two types of organization of economic activities?
Ans. The two types of organization of economic activities are centrally planned economies and market economies.
Q3. Who is the controller of a centrally planned economy?
Ans. The centrally planned economies are usually under government.
Q4. Who sets the prices of products in centrally planned economies?
Ans. The governments set the prices of products and there is no role of demand and supply in the pricing process of commodities.
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