Explain How Resources Are Allocated In Reference To The Different Economic Systems?

1669 words - 7 pages

An economic system is the result of individuals (consumers and producers), groups (firms, trade unions, political parties, families etc) and the government coming together and interacting in a legal and social society. The function of an economic system is to resolve the basic economic problem - scarcity which means that the resources are limited but wants are infinite. This distribution has three dimensions:* What is to be produced* How is it to be produced* For whom is it to be produced.There are 2 economic systems which are commonly used world-wide. There are: the free market system in which the role for the government is limited and the planned system where the government takes viturally total control. In both of these systmes there are different methods of resource allocation used. There are economies that use a mixture of these systems in particular the planned and free market system also known as the mixed economy in which some of the decisions resource allocation are done by the government and other by the public.In a free market economy:*The factors of production are owned by private individuals or groups of individuals who own the resources. They then rent them out to the firms so that they can produce the goods and services.*Everyone is motivated by pure self interest. Consumers maximise welfare, firms maximise profits and privated individuals aim to maximise rents, wages interest and profit.*Firms can sell anything they want. They respond to the consumers who are allowed to by anything that is sold by the producers.*The level of competition is very high. Firms are competing desperately for customers and the consumers are competing with each other for the goods on offerHow are resources allocated under a market mechanism?What is to be produced?In a pure free market, it is the consumer which determines the allocation of resources. Consumers are sovereign. Each consumer has a free choice on the amount of money to spend on goods and services. Firms with the money recieved, buy the factors of production needed to produce goods and sercives. In other words in a free market a firm will only produce what the consumers are prepared to buy. The consumers are the ones to dicate the goods that should be produced. For example the public decides that they want to buy more product X than product Y. The increase in demand for product X will increase the price at first. The production of product X will increase since many new first will get attracted with the idea of profit and at the same time the level of competition will increase. On the other hand for product Y the demand will fall along with profits. In general there is a transfer of resources from one industry to another.How will it be produced?There is competition between the various firms. Consumers will buy from the producers which offer the lowest price. So producers must produce at lowest cost. This then determines how goods are produced. The firms will adpot the lowest cost technique of...

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