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Resource allocation

1. The process by which scarce resources in the economy are distributed amongst their alternative uses. A basic assumption underlying the whole of economics is that resources are ‘relatively scarce’. That is, if all prices were zero, the combined demands of all consumers in the economy for all goods and services would greatly exceed the capacity available to produce them, determined by the resources the economy possesses, on the one hand, and the technological possibilities of production, on the other. This is held to be true however abundant, in some absolute sense, resources may appear to be. Given relative scarcity, it is necessary to know how much of each resource will be allocated to production of each good, and how much of each good will be allocated to each consumer. Economics as an academic discipline is concerned with the study of how this allocation problem is solved, especially (though not exclusively) in economies where the mechanism by which resources are allocated is based upon market forces. 2. A resource allocation can be thought of as a specific list of quantities: a leve! of output for every good and service in the economy – steel, milk, haircuts, college tuition, cornflakes, and so on; a leve! of consumption of each good and service by each con­surner in the economy; an amount of each factor of production used by each production unit in the economy; and an amount of each factor of production supplied by each owner of resources in the economy – labour services of carpenters, plumbers, dockers or post­men, supply of capita! by savers and entrepreneurs, and so on. Thus a specific resource allocation is a very long and detailed list indeed. Nevertheless, each day, the economic system arrives at such an allocation. The main purpose of economics is then to understand how this comes about, what the determinants of the achieved allocation are, and whether the specific allocation actually achieved is in some sense the best possible.

Reference: The Penguin Dictionary of Economics, 3rd edt.