Resource allocation Flashcards
what is resource allocation
this refers to how resources are distributed among producers and how goods and services are distributed among consumers
what is a product market
A product market is where goods and services are produced by firms and then sold to consumers. Consumers use their income from selling resources, such as labour, to
buy the goods and services.
what is a factor market
Factor markets are where the services of land, labour, capital and enterprise- the factors of production, are sold and bought. For example, the labour market is a factor market
how do factor and product markets affect each other
changes in one of these market affect another , because of the interrelationship between the markets
how do economic agents act and how does it affect the consumer
In reality, economic agents do not behave rationally. Acting rationally means making a decision that results in the most optimal level of utility or benefit for the consumer. This can lead to a misallocation of resources
what are free market economies
Also known as laissez-faire economies, where governments leave markets to their own devices, so the market forces of supply and demand allocate scarce
resources.
The free market operates on the assumptions of a large number of buyers and sellers and of perfect information between buyers and sellers.
Economic decisions are taken by private individuals and firms, and private individuals own everything. There is no government intervention.
In reality, governments usually intervene by implementing laws and public services, such as property rights and national defense
.
what are the incentives of resource allocation for economic growth
Economic agents respond to incentives, which can allocate scarce resources to
provide the highest utility to each agent.
For the entrepreneur in a firm, the incentive for taking risks is profit. Rewards are positive incentives which will make consumers better off, whilst penalties make them worse off.
Where incentives are not given properly, resources will be misallocated.
Prices in market economies provide signals to buyers and sellers, which is an incentive to purchase or sell the good. This changes their behavior
.
For example, a high demand and high price for a good will give an incentive to firms
to allocate more resources to producing that good.
An entrepreneur wants to avoid loss and gain profit, which makes them want to
innovate, so they can reduce their production costs, and improve the quality of their
products.
Firms need an incentive to engage in risk taking, so they innovate. Without
innovation, production will cost more and there will be a misallocation of resources.
