Final answer:
In a command economy, the government sets prices and controls quantities, which leads to potential shortages or surpluses rather than price fluctuations as seen in a market economy where prices can fluctuate in response to supply and demand. Over the long term, supply and demand adjustments can lead to more significant changes in quantity rather than price due to elasticity. Government intervention can also influence economic stability.
Step-by-step explanation:
In a command economy, the balance between supply and demand does not often sustain prices as it does in a market economy because the government typically sets prices and controls the quantities supplied. In such an economy, prices and production levels are set by central planners, whereas in a market-oriented economy, prices are determined by the forces of supply and demand without direct government intervention. Instead, consumers and businesses interact on the basis of their individual preferences and profitability, causing fluctuation in prices and quantities as they strive for equilibrium.
The dynamic interaction of supply and demand in a market economy serves as a social mechanism for collecting, combining, and transmitting information and then conveying it to buyers and sellers. When a change in price occurs, no centralized guidance exists; thus, each participant in the market adjusts according to their specific situation. In the short term, supply and demand may be inelastic, causing prices to fluctuate, but in the long term, they become more elastic, allowing quantities to adjust more significantly.
However, because the command economy does not operate on these principles, imbalances between supply and demand typically lead to shortages or surpluses rather than price fluctuation. Governments may intervene in various ways, such as by changing interest rates to stimulate lending and spending, in attempts to mitigate potential economic instability, rather than letting the natural cycles of the market take their course.