Final answer:
In a planned economy, the government determines both the prices for goods and services and decides what goods will be produced. Businesses do not have the autonomy to decide what to produce to maximize profits, unlike in a market economy. Government-directed production replaces market-based decisions typical in countries with a market economy.
Step-by-step explanation:
In a planned economy, which is sometimes also referred to as a command economy, the government makes key decisions about the production and distribution of goods and services. This includes determining the prices for these goods and services as well as dictating what goods will be produced. Unlike a market economy where prices are influenced by the forces of supply and demand and firms determine what to produce to maximize profits, in a planned economy firms do not have this autonomy. Instead, the government directs production based on its assessment of what the economy needs. This might involve setting production targets, controlling resource allocation, and providing essential services such as healthcare and education at controlled or no cost to the consumer.
For example, countries like Cuba and North Korea are often cited as having command economies where the government exerts extensive control over economic activities. Here, the government decides the methods of production and often sets wages for workers at a standardized rate. This type of economic system contrasts with a market economy, where businesses make decisions based on the demand and supply of goods and services and compete by varying price and quality.