In a market economy, the patterns of resource allocation are most directly influenced by ________.

How does a society decide what to produce and how much to produce? Why is it important to know what to do with available resources? Well, the fact of the matter is that resources are limited. No society has a bottomless well of resources available to them, therefore, there must be a system created to know what and how much to produce and how to distribute it all. To learn how to allocate resources, types of resource allocation, and more, read on!

Resource Allocation Definition

Resource allocation is the distribution of finite resources to specified purposes selected from among several feasible possibilities. However, no society has endless resources; resources are limited. Because they're limited, it is vital to choose which commodities and services to create in order to assure efficiency.

Resource allocation is the distribution of finite resources to specified purposes selected from among several feasible possibilities.

How does one choose which commodities and services should be created? Well, it depends on the type of system that society has. The economic system used by society, like a market, command, or mixed economy, has a substantial impact on resource allocation. Each system has its own set of legal frameworks for allocating limited resources and output.

Decisions on how to distribute resources in a market economy are often made by millions of families and thousands of enterprises — the exact figure will, obviously, vary according to the size of the economy. The critical part is that they engage in the market for products and services as consumers and sellers. A product that is low in supply but in high demand will carry a high price. Meanwhile, one with low demand yet a high supply will have a considerably cheaper price. That which is in the best interest of people and enterprises, as well as prices, serve as the basis of the choices that are to be made with resource allocation.

Market economy is a type of economic structure in which two forces, supply and demand, govern the creation of products and services.

In a market economy, the government has quite a limited role to play.

With the command economy, the government plays a prominent role in all choices made, and, different from the market economy, the focus is on centralization. As a result, central planning tends to define economic goals that contrast with those of market economies. They have a primary goal of obtaining the highest economic rate of growth feasible in order to keep pace with the advances achieved by far more sophisticated market economies.

Command economy is an economic structure in which a central governing body determines the permissible levels of output.

The mixed economy is unquestionably the most distinctive kind of economic organization in the global economy. As the name implies, it involves both the private and public parts of the economy in the distribution of resources. As a result, most major economic choices entail some type of preparation (by private and public firms) and cooperation between government, corporations, and laborers.

Mixed economy is an economic structure that consists of elements of a market economy and those of a command economy.

How to Allocate Resources

Addressing three essential questions about resource allocation lets us know how to allocate the resources:

• What products and services should be produced?
• How will such products and services be produced?
• Who will get to have these goods and services?

What products and services to produce?

Out of the three, the first topic for society to address is, "What products and services should we create with our finite resources?" Should there be more t-shirts made or more button-ups? Notebooks or planners? Ammunition or laptops? The answer to this is important because resources are limited, whereas needs and desires are not. While it's understandable that a lot of products and services are desired, unfortunately, society cannot produce everything that everyone wants — there are limits. There must be a decision made as to what is best to produce.

How to produce the products and services?

The second topic to be addressed is how society's finite resources are utilized to generate products and services. For example: Should water be sold in plastic bottles or glass bottles? Are books to be made with new paper or recycled? Should there be more self-checkouts made for the stores or more human employees kept instead? The decision must be made as to how to allocate limited resources to which commodities. After all, not all products can be produced with the same resources.

Who gets the goods and services?

The third of three allocation issues is, "Who obtains the commodities and services created by society's resources?" Should all of the commodities be supplied to the best workers? Should products be allocated based on age? Income? What about the unemployed then? The production of products is constrained due to limited resources, and due to that, not everyone can get everything they want. There has to be a way to figure out who gets which products and by which criteria they get them.

Resource allocation is like combining several pieces of a puzzle. The intent is to make all of the pieces fit to show the big picture, and to show that all pieces are needed to make a whole. This is exactly what resource allocation does. It combines several factors at once in order to make everything work. All things need to be taken into consideration when it comes to resource allocation, in order to figure out where the resources are most needed.

Resource Allocation Strategies

Resource allocation techniques are the procedures used to allocate products and services. There are nine fundamental ways, and they are occasionally combined. They are:

Command: a central authority provides the product or service.

Random: the service or product is distributed at random, with everybody getting an equal chance of receiving it.

Arbitrary characteristic: a service or product is granted to an individual due to the fact that they fulfill particular criteria, such as age, location, ethnicity, sex, and so on. Because they can alter, the qualities are seen as arbitrary.

Competition: the item or service is given to the winner of a tournament, game, or event.

Force: someone takes the product or a service using legal or illegal means, such as stealing.

Price: the item or service is awarded to the individual capable and willing to pay more than anyone else for it.

First-come, first-served: the very first individual to claim a commodity or service, gets the resource. An example of this would be if there are only two copies of a popular book available for purchase. This would be first-come, first-served!

Majority rule: the individual who receives a majority (or occasionally a plurality) of votes, as in an election, receives the commodity or service.

Resource Allocation Examples

Let's run through an example of resource allocation in order to get a clear picture of what it entails.

Imagine you were to decide to remodel a room in your house. The questions to ask regarding resource allocation would be the following:

• Who are you going to hire?

• What type of materials are needed?

• What's your budget for the remodel?

• How much of your budget is going to go towards paying the workers and how much of it has to go towards materials?

• By when do you want the remodel to be done?

After you've completed answering all of those questions, there are still parts that need to be given attention. Let's say you wound up having three workers doing the remodel, two ladders, two tool-kits, 2 buckets of paint, and a deadline of a month. These are the resources. But who is going to remodel which part? Which two of the three workers get to use the tool kits? How are they to divide their time equally to get the remodel done in time? What is the optimum daily workload? These are all questions that need to be answered.

One of the most critical components of resource allocation is assigning the appropriate people to a certain job. If you assign a basic, entry-level assignment to a skilled employee or a hard job to a new employee or trainee, you will not receive a great outcome. The cost would be unreasonably expensive in the first instance, and the latter would be stressful with disappointing outcomes.

Types of Resource Allocation

Fig. 1 - Types of Resource Allocation

There are mainly two types of resource allocation that are focused on: continuous and and one-time.

• Continuous - It requires a steady intake of the resources necessary. To operate the organization, financial resources, for example, are required on a regular basis.

• One-time - It indicates that resources are only assigned and used one time in a process. For example, technology and equipment is something that is only needed once for a company to run its business; more of it is not needed every day. Thus, it is a one-time allocation.

Importance of Good Resource Allocation

One of the main reasons that good resource allocation is important is due to scarcity. Scarcity pertains to a fundamental economic issue: the imbalance between finite resources and buyers' potentially boundless necessities and wants. Time and money are two major examples of limited resources. The majority of people have insufficient amounts of one, the other, or both.

Scarcityis when there is a high demand, but not enough supply to meet the demand.

In a perfect world, there would be an abundance of all resources, like water, knowledge, property, and food. There would be no need to figure out how resources are to be allocated. In real life, things are different. Everything has a price. To put it differently, all commodities and production factors are finite to a certain extent. Therefore, good decisions must be made about what products to make and how to make them, which is what resource allocation is all about.

Resource Allocation - Key Takeaways

• Resource allocation is the distribution of finite resources to specified purposes selected from among several feasible possibilities.
• Resource allocation techniques are the procedures used to allocate products and services.
• There are mainly two types of resource allocation that are focused on: continuous and and one-time.
• One of the main reasons that good resource allocation is important is due to scarcity.
• Scarcityis when there is a high demand, but not enough supply to meet the demand.

Who determines the allocation of resources in a market economy?

How does a market system allocate resources?

How is allocation of resources determined in a free market economy?

What determines the allocation of resources and distribution of goods in a market?