Resource Allocation in Market, Command and Mixed economy.

Resource allocation

Resource allocation is defined as the way in which limited resources are distributed to produce goods and services.

Resource allocation in free market economy

In free market economy, resources are allocated according to the market forces of demand and supply. Here, resource allocation is determined by consumers' demand and producers' supply. Demand is the most influential factor.

Resource allocation in command economy

In command or planned economy resources are allocated by the government through centralized planning. The central planning Authority decides what to produce, how to produce and for whom to produce.

Resource allocation in mixed economy

In a mixed economy, both private and public sector play an important role in economy. Private sector allocates resources according to the demand and supply. Public sector allocates resources through centralized planning.

Factors of production

The term 'factors of productions' is defined as the limited resources used in the production of goods and services. There are four factors of production. They are land, labour, capital and entrepreneur.

              Land

•  Land is defined as the natural resources used in the production of goods and services.
•   Land is a free gift of nature. 
•  Land is occupationally mobile and geographically immobile.
•   Some natural resources are renewable whilst others are non-renewable 
•  The reward for land is rent. 

              Labour

•  In economics, labour is defined as any human effort, physical or mental, skilled or unskilled done for a reward and not for the pleasure derived from it.
•   Labour is a human resource. 
•   Labour is both geographically and occupationally mobile. 
  
•  The reward for labour is salary or wage.

   

             Capital

•  In economics, capital is defined as the man - made goods used in the production of goods and services. Examples include, factory building, factory machines …etc used in the production.
•  Capital is divided into working capital and fixed capital. 
  
•  The reward for capital is interest. 

             Entrepreneur

•  Entrepreneur is the person who organizes land, labour and capital for production to achieve profit.
•  Enterprise is the entrepreneur’s willingness and ability to bear uncertain risks and to make decisions in a business.
•    Enterprise is the most mobile factor occupationally and geographically.
•  The reward for entrepreneur is profit.

Important basic definitions

Economics
Economics is a social science which study about human behaviour as a relationship between end and scarce means which have alternative uses.
                                                                                            ( Scarcity definition by Lionel Robins)
Scarcity
Scarcity refers when a commodity is not enough for the consumption of everyone in the society.

Choice 
It is defined as the selection between two more goods and services.

Opportunity cost
It is defined as the next best alternative forgone.

Economising
Economising refers to making the best of what we have.

Needs
Needs are the basic necessities essential for our survival.

Wants
Wants are the desires people have over and above their needs.  Examples include the desire to have luxurious cars, expensive mobile phones …etc. Some wants become needs with the economic development. Examples include, Education, electricity …etc.
     

Resources
Resources are the factors of production used to produce goods and services. Resources can be classified into natural resource, human resources and manufactured resources (Man- made resources).
      
Services

These are the intangible things that we buy, use or produce. Services cannot be seen and touched. Examples are the services of doctors, teacher, lawyers … etc.

Goods
Goods are the things that are tangible and have the power to satisfy human wants. Goods can be seen, touched or felt.

Consumption
Consumption is ‘using up’ of goods and services to satisfy consumer wants. Goods and services can be consumed directly or indirectly.

Distribution
In economics, distribution is dividing resources into different sectors of production in the most efficient way. Exchange is buying and selling of goods and services for a medium of exchange.

Utility
Utility is the satisfaction (pleasure or benefit) we receive from consuming goods and services.

Nature of economic problems

Scarcity arises because of three basic economic problems, unlimited human wants, limited resources and limited resources have alternative uses. Scarcity is when a commodity is not enough for the consumption of everyone in the society. Scarcity forces humans to choose between their wants and needs. Choice is the selection between two or more goods and services. When we choose we are unable to satisfy all our wants and needs. Hence, choice leads to opportunity cost. Opportunity cost is the next best alternative forgone.