Compare And Contrast Two Alternative Systems Of Resource Allocation In The Economy
Economics can be said to be the science which studies the relationship between scarce resources, with alternative uses, and consumers’ unlimited wants. Therefore the ‘problem’ of resource allocation can be seen to be central to the basic economic problem. In this way , how resources are allocated throughout an economy is of great importance and different types of economies employ different methods to achieve this allocation.
All economies have this same basic economic problem of ‘what’ to produce, ‘how’ to produce it, and ‘for whom’ to produce it. Deciding what to produce involves choosing a certain allocation of resources, in order to produce a particular combination of goods. The method of choosing the resource allocation varies, according to the economy in question. There is also the question of how to produce the goods which you require. ‘Any particular output can usually be produced by several different techniques, ranging from ones using a large quantity of labour and only a few simple machines, to ones using a large quantity of automated machines and only a few workers.’ (R.G.Lipsey; 1989) Different economies also vary in the way that national product is distributed throughout the individuals and groups within the society.
The methods which a society uses in order to tackle these questions determines the type of economy it is. There are various methods of resource allocation and the two most extreme cases are the contrasting methods of the ‘free-market’ and the ‘command’ economies.
‘In a market economy, the allocation of resources is the outcome of millions of independent decisions made by consumers and producers, all acting through the medium of the market’ (Lipsey; 1989)
The free-market economy depends upon the interaction of consumers and producers, all acting in their own self interest. The allocation of resources throughout the economy occurs via the ‘price system’ a system which sets the free-market economy aside from the command economy. This system works in conjunction with the theory of demand and supply, that is, price is a function of the demand and supply of goods and services.
An example of this could be illustrated using the markets for beef and pork. Let us say that, due to the recent British Beef crisis, the market demand for beef has fallen considerably while the market demand for pork has risen.
The diagrams above illustrate the effects of the changes in market demand. The demand for beef has shifted from to, this shift causes the quantity demanded at price to fall from to. This creates a surplus of unwanted beef which can only be sold if prices fall to. Also, the shift in demand for pork, from to causes quantity demanded at price to rise from. This leads to a shortage of pork, which can combated by raising prices to ration resources.
Pork will now become a relatively expensive, scarce commodity, in...