Allocation of Resources: 1) What To Produce?

Allocation of Resources
Every society faces the basic economic problem of limited resources and unlimited
human wants. Therefore, we cannot produce all the goods and services required by all
the people. So we have to decide the best use of our limited resources in order to
satisfy many people’s wants.
Resource allocation
Resource allocation means the distribution (allocation) of scarce economic resources

among the different sectors of production according to priority to maximise profit. It is a
strategic plan of how to use the available resources in order to produce goods and
service of economic value.
When allocating the resources the organisation needs to answer three basic economic
questions
1) What to produce?
 This means what goods and services are to be produced and in what quantities.
 The central problem of what to produce arise because the resources are scarce
and they have alternate uses.
2) How to produce?
 This means how the goods and services should be produced.
 The problem of how to produce deals with the problem of choosing the
technique of production that is to be used for producing the output.
3) For whom to produce?
 This means who should receive the goods and services produced.
 This question is related the problem of distribution.
 The society might have to decide whether the goods should be distributed
(provided) to the people who can pay the highest prices or the people who can't
afford to pay for the goods, or both of them.
ECONOMIC SYSTEMS
Nations and societies use different methods to determine how to use their limited
resources efficiently. That means different countries will try to solve the problems of
what to produce, how to produce and for whom to produce in different ways. The
method used by the nations to answer these questions is its economic system.
An economic system can be defined as a way in which a nation or state handles its
resources in utilising it to the benefit of the community.
Market Economic System

A market economic system is where most of the resources are controlled and owned by
individuals. In a market economy there is considerable freedom for people to buy what
they want and sell what they produce. The price of goods and service are determined
through voluntary transactions governed by the interaction of demand and supply.
Examples include, USA, Hong Kong, South Korea etc
In market economy, the three fundamental questions of what, how and for whom to
produce are addressed as follows.
• What to produce: determined by what the consumer prefers

• How to produce it: producers determine the method of production which
maximise profit
• For whom to produce it: whoever has the greatest purchasing power in the
economy, and is therefore able to buy the goods
Advantages
 Consumers get a wide range of goods.
 Producers are encouraged to produce what consumers want, leads to innovation
 Consumers and producers have more freedom of choice
 It encourages competition between firms leading to greater efficiency.
Disadvantages
 Wealth generates wealth, leading to greater inequalities between rich and the
poor.
 As there is less interference by the government, business tend to employ
methods which may cause environmental damage
 Capitalist Economy does not fully take into account the issues like health and
safety.
 It does not provide public goods and merit goods.
 Use of modern equipment leads to unemployment with the people feeling socially
insecure
Command economic system

Command economy is an economic system where all resources are allocated by the
government, with no markets. It is the government that decides what to produce, how to
produce goods and how to distribute goods and services within the economy.
Examples include; Cuba, China, North Korea.
Characteristics of command economy
• In a command economy, economic resources are publicly owned
• Planned Production: Economic activities are carried out according to a national
plan.
• Resources are allocated to industries by the government directives and economic
activities are answered by the state.
• Prices are fixed by the government.
• Price does not changes in response to the changes in demand and supply.
• Production is carried out for the welfare for the people but not to maximize the
profit.
In command economy, the three fundamental questions of what, how and for whom to
• What to produce: government will make all the economic decisions and owns
most of the property
• How to produce it: government planning groups decides the methods of
production and how the resources are allocated to the different factors of
production
• For whom to produce it: whoever the government decides to give them
Advantages
 Economic activities are free from instability (the economy will be more stable)
 Income and wealth are equally distributed
 Every citizen is provided with minimum requirements like food, clothing, health
and education
 The nation has command over activities
 Economic activities are well planned and targets are fixed.
 Welfare motive: most people will be able to afford the goods and services.
Disadvantages
 Less consumer choice as it provides only limited range of goods and services
 Absence of competition leads to reduce quality of products
 In most command economies, there is a shortage of goods which push up the
prices of most essential goods
 Higher degree of movement influence leads to beaurocracy and its draw backs
like corruption, bribery and development of shadow market (black market)
Mixed economic system

Mixed economy is an economic system where resources are partly allocated by the
market and partly by the government. It means the market is controlled by both the
government and the forces of supply and demand.
Example: UK
Features of mixed economies
• Co-existence of private and public sector
• Centralized planning
• Co-ownership of industries
• Reduction of economic inequalities: redistribution of income and wealth through
taxation and government subsidies to eliminate inequalities in income and wealth
In a mixed economy, the three fundamental questions of what, how and for whom to
• What to produce: determined by both consumer and government preferences

• How to produce it: determined by producers making profits and the government
• For whom to produce it: both whom the government prefers and the purchasing
power of private individuals.
Advantages of mixed economy

 The presence of price mechanism helps to allocate the scarce resources
effective and efficiently
 Effective utilization of economic resources due to prior planning
 The presence of freedom of choice , profit motive, competition etc increase the
economic efficiency in the country
Disadvantages of mixed economy
 Conflict between the sectors and its aims to make difficult to operate system
 Social evils like corruption and black markets can rise
 Excessive control over private section and government dictatorship will discourage
private individuals and firms
 Dependence on the government kills efficiency of private sector

Allocation of Resources: 1) What To Produce?

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Allocation of Resources

Resource allocation means the distribution (allocation) of scarce economic resources

Market Economic System

• What to produce: determined by what the consumer prefers

Command economic system

Mixed economic system

• What to produce: determined by both consumer and government preferences

Advantages of mixed economy

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