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What Is an Allocation of Resources?

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  • Written By: Osmand Vitez
  • Edited By: Kristen Osborne
  • Last Modified Date: 15 August 2014
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The allocation of resources is an economic theory concerned with the discovery of how nations, companies or individuals distribute economic resources or inputs in the economic marketplace. Traditional business inputs are land, labor and capital. Entrepreneurship or enterprise may also be included in this group since entrepreneurs or enterprises are usually responsible for the allocation of resources. The economic concept of private resource allocation is an important area of study in the free market system and the economic theory known as "the invisible hand."

Many economists believe that "the invisible hand" theory is the driving force for allocating resources in the free market economic system. Under this theory, the allocation of resources is created through the self interest, competition and supply and demand of individuals and companies in the economic marketplace. Individuals and companies distribute resources through self regulation by using only the inputs they need and selling or giving away their leftover economic resources or inputs. Through this distribution of resources, the economic market place grows and expands as more individuals and companies have access to resources.

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Each economic resource or input has an important place in the economic marketplace. Historically, land includes natural resources, such as timber, wildlife, soil and rock. In modern terms, this economic resource includes buildings, equipment or other major assets owned by individuals and companies needed to produce consumer goods or services. Labor is the manpower companies use to transform raw economic resources into finished goods or services. Capital usually represents the money acquired or made from the sale of consumer goods and services produced by the other two economic resources. Economics is concerned with how these resources are allocated to determine the best use for a nation’s natural economic resources and the labor of its citizens.

An allocation of resources analysis also looks at the costs involved with acquiring economic resources or inputs and how efficiently these resources are transformed into valuable goods or services. This analysis may also attempt to determine the competitive advantage nations or companies have when using their economic resources or inputs to create goods or services. Rather than using inefficient production processes or methods to develop goods, nations or companies may be better off selling their economic resources to other nations or companies and earn higher amounts of capital resources. Using the competitive advantage method for the allocation of resources can be a beneficial way to improve the quality of life of individuals living in the nation or working for private companies.

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David09
Post 4

@hamje32 - In principle I agree with you, but I have to ask – is this “efficiency” that you speak of always a good thing?

Take outsourcing as an example. I think the majority of people would agree that outsourcing means fewer jobs for Americans, which is not a good thing.

Yet who can deny that outsourced labor is cheaper and therefore more “efficient”? I don’t think we can really have value-neutral discussions in defense of the free market system.

I am not saying that I believe that the command economy is perfect, either; only that the free market system is not always beneficial to everyone, as the Invisible Hand theory suggests.

hamje32
Post 3

I learned about the “invisible hand” theory in college and immediately saw its genius, because it does tend to get played out in our free market capitalist system.

I can think of no other context where individual self-interest and pursuit would result in the benefit of the whole community. This is the idea of the invisible hand, and later I read more about it in the late Milton’s Friedman’s studies on economics.

In contrast to the invisible hand, there is the very visible hand (my words) of government control of the economy, or command economies as the economists like to call it.

I have yet to see a single example of any nation in the world where this command economy has proven itself at being very efficient and effective in the allocation of resources. In my opinion, governments certainly have their place, but they demonstrate inefficiency when it comes to directing economic activity.

sunnySkys
Post 2

@SZapper - I think it makes sense too, on that level anyway.

I kind of don't think the overall theory makes sense though. These days, our economy just does not self regulate. It's pretty much regulated by the governments. For example, companies aren't allowed to have a monopoly. There are all kinds of other things they can't do or have to do too!

I don't think there is anything wrong with that, but it kind of make a self regulating economy impossible.

SZapper
Post 1

I think it's interesting that buildings are classified under "land" in allocation of resources. In modern times, I think buildings and equipment are used to produce goods much more than land is! I mean, at the rate we're going environmentally, soon we're not going to have much land left.

Also, buildings and equipments can be used to produce goods, or sold, just like land. I think there are a lot of parallels between land and buildings, so this classification makes a lot of sense.

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