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MARGINAL REVENUE PRODUCT AND FACTOR DEMAND: A perfectly competitive firm's factor demand curve is that negatively-sloped portion of its marginal revenue product curve. A perfectly competitive firm maximizes profit by hiring the quantity of input that equates factor price and marginal revenue product. As such, the firm moves along its negatively-sloped marginal revenue product curve in response to changing factor prices.

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CENTRAL PLANNING:

A system of extensive central government control of an economy, including organizing production and making allocation decisions. This was the popular method of allocating resources and answering the three basic questions of allocation under communism and socialism economic systems of the Soviet Union, China, and others during the 1950s, 1960s, and 1970s.
Applying the communist/socialist philosophy that private property and market allocation was "bad", central planning relied on extremely detailed plans made by government. These plans would set specific production quotas for individual products, parts, components, and inputs fabricated by all of the factories and farms across the economy. This was a daunting, complex task that required detailed production information for hundreds of thousands of different commodities.

Inefficiency

While some attribute the fall of the Soviet Union in the 1980s to the United States military build-up, the burdensome bureaucratic inefficiency of central planning played an important role, if not THE key role in this decline.

Central planning tends to be inefficient due to:

  • One, the resources used for the central planning process cannot be used to undertake actual production. In other words, a person (the planner) who spends eight hours calculating how much flour is needed to produce bread, is not actually producing any bread.

  • Two, the central planning process, being developed and implemented by mere humans, is inherently flawed. Mistakes happen. Inputs are sent to the wrong factories. A decimal point is misplaced. Too much of one good is produced and too little of another. All of these mistakes mean less output is produced with available resources.

Central Planning and Capitalism

While central planning is usually associated with communist/socialist economies it is also practiced, to a much lesser degree, by market-oriented economies such as that found in the United States. For example, the Federal Reserve System has a "central plan" for the growth of the money supply. The Department of Transportation has a "central plan" for highway construction. Almost every city has a "central plan" that specifies where different types of activities can locate within the city.

There are two main differences between "central plans" found in capitalism and communist/socialist-type central planning.

  • First, the plans found in capitalism are usually only for a segment of the economy. They do not attempt to integrate the massive amounts of information needed for an economy-wide central plan.

  • Second, planning undertaken in capitalism works within the confines of a market-based economy, making use of market efficiencies, rather than attempting to provide an alternative to the system.

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CENTRAL PLANNING, AmosWEB Encyclonomic WEB*pedia, http://www.AmosWEB.com, AmosWEB LLC, 2000-2022. [Accessed: October 6, 2022].


Check Out These Related Terms...

     | socialism | capitalism | market-oriented economy | government functions | paternalism | nationalization | planned economy | command economy | pure command economy |


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     | economic system | communism | public sector |


And For Further Study...

     | private property | seventh rule of complexity | mixed economy | distribution standards | economic goals | three questions of allocation | pure market economy |


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