The Allocation of Resources

The Concept of Resource Allocation

In economics, resource allocation refers to the distribution of resources among competing uses.
Resources are allocated based on the choices that consumers, businesses and governments make.
The primary function of the market mechanism is to facilitate this allocation of resources.
Scarcity is the basic economic problem that comes from unlimited desires facing limited resources.
Economists often identify three types of economic systems for resource allocation: free markets, centrally-planned or command economies, and mixed economies.

Economic Systems for Resource Allocation

Free Market Economies

Free market economies are characterised by private ownership of resources and the use of price mechanism for resource allocation.
Price mechanism operates based on supply and demand; when demand exceeds supply, prices rise and vice versa.
In free markets, there is competition among businesses, which encourages efficiency and innovation.
However, pure free market economies can lead to unequal wealth distribution and may not provide for public goods or externalities.

Centrally Planned Economies

In centrally-planned economies, the government owns most resources and makes decisions on what and how much to produce.
This method of resource allocation can cater for social objectives, but it lacks the incentive for efficiency and innovation.
It also cannot adapt quickly to changing consumer preferences or circumstances.

Mixed Economies

Mixed economies combine aspects of free market and centrally-planned economies.
Governments can intervene to address market failures, provide public goods, or to redistribute income.
However, the extent of government intervention varies widely among mixed economies.

Factors Influencing Resource Allocation

Availability of resources: Economies tend to use their abundant resources extensively.
Consumer preferences: These directly affect demand for products and hence the allocation of resources.
Technology and innovation: They can increase resource availability or introduce new ways of using resources.
Market failures and government intervention: They can drastically alter how resources are allocated.

Effects of Resource Allocation

The way in which resources are allocated will greatly influence an economy’s efficiency and equity.
Productive efficiency happens when goods and services are produced at the lowest possible cost.
Allocative efficiency is when resources are allocated in a way that maximises the welfare of the society.
Equity is when resources are fairly distributed in the society. Different economic systems have different views on what constitutes ‘fair’.