Lange Model - Basic Principles

Basic Principles

The Lange model suggests three levels of decision-making. Firms and households represent the lowest level, with industrial ministries as the intermediate level, and the highest level of decision-making is made up of the central planning board. The central planning board sets the initial price of consumer goods arbitrarily and informs the producing firms of these prices. The state-owned firms would then produce at the level of output where marginal cost is equal to price, P = MC, so as to minimize the cost of production. At the intermediate level, industrial authorities represented by the industrial ministries are responsible for determining the sectoral expansion of industry. At the lowest level of decision making, households decide how to allocate income and how much labor to supply by choosing between work and leisure.