Allocation of resources is a crucial issue in economics, as resources are scarce and wants and needs are unlimited. The method of deciding which wants and needs to satisfy is known as allocative efficiency. The allocation of resources can be determined by either the state in a controlled economy or by individuals in a free market economy.
Economic systems are a set of institutional arrangements and a coordinating mechanism that solves economic problems. The amount of decentralized decision-making and centralized government control differs between different economic systems. In a free market economy, resources are owned by private individuals and institutions, and markets and prices coordinate and direct economic activity. The law of demand states that when prices go up, the quantity demanded goes down, and when prices go down, the quantity demanded goes up.
The determinants of demand are things that can shift the entire demand curve causing demand to change. The determinants include changes in consumer tastes and preferences, the number of buyers, income, prices of related goods, and consumer expectations. The law of supply states that other things equal, as the price rises, the quantity supplied rises, and as the price falls, the quantity supplied falls. The relationship between price and quantity supplied is directly related, and producers will offer more of a product for sale as its price rises and less as its price falls.
Markets play a crucial role in determining the price of goods and services. In a market, there are multiple buyers and multiple sellers, and the price is determined by the interaction between buyers and sellers. When the supply of a good exceeds the demand, the price will fall, and when the demand exceeds the supply, the price will rise. The market mechanism ensures that resources are allocated to the most valuable use, maximizing the satisfaction of consumers.
In conclusion, allocative efficiency plays a vital role in economics, determining the allocation of resources to the most valuable use. The state or individuals, depending on the economic system, determine the allocation of resources. The market mechanism ensures that resources are allocated to maximize the satisfaction of consumers.
