Resource Allocation
2
Economic Systems for Resource Allocation
Decisions about resource allocation are necessary because we live in a world of scarcity. A review of the ideas listed at Key Points 1.1 and 1.2 should remind you of how central this basic premise is to the study of any branch of economics. To take a surreal example, when you open your front door in the early morning there are not millions of bottles of milk covering the neighbour’s lawn; nor is there no milk. There is just enough bottled milk to meet the demand: say, the two pints your neighbour ordered. What this chapter seeks to explain is how this finely tuned allocation of resources can occur, given the multitude of construction, manufacturing and service resources that simultaneously need to be allocated. The problems of resource allocation are solved by the economic system at work in a nation. In the case of construction, resource allocation has been strongly influenced by the public sector. What is produced, how it is produced and for whom can be determined by central government – and it was frequently – but governments across Europe now prefer to use a market system to answer the what, how and for whom questions. In general terms, therefore, it is possible to envisage two model systems. Each economic model brings together producers and consumers in different ways and each needs to be appreciated in order to understand how the universal questions about resource allocation are resolved.
Economic Systems: Two Extremes
The problem of resource allocation is universal as every nation has to tackle the issue of determining what, how and for whom goods and services will be produced. In Figure 2.1 we begin our presentation of the economic systems of the world by introducing two extremes: the free market model and the centrally planned model (along with two exemplar nations).
Figure 2.1 A spectrum of economic systems
On the extreme right-hand side of the diagram is the free market model, and on the extreme
Economic Systems for Resource Allocation
Decisions about resource allocation are necessary because we live in a world of scarcity. A review of the ideas listed at Key Points 1.1 and 1.2 should remind you of how central this basic premise is to the study of any branch of economics. To take a surreal example, when you open your front door in the early morning there are not millions of bottles of milk covering the neighbour’s lawn; nor is there no milk. There is just enough bottled milk to meet the demand: say, the two pints your neighbour ordered. What this chapter seeks to explain is how this finely tuned allocation of resources can occur, given the multitude of construction, manufacturing and service resources that simultaneously need to be allocated. The problems of resource allocation are solved by the economic system at work in a nation. In the case of construction, resource allocation has been strongly influenced by the public sector. What is produced, how it is produced and for whom can be determined by central government – and it was frequently – but governments across Europe now prefer to use a market system to answer the what, how and for whom questions. In general terms, therefore, it is possible to envisage two model systems. Each economic model brings together producers and consumers in different ways and each needs to be appreciated in order to understand how the universal questions about resource allocation are resolved.
Economic Systems: Two Extremes
The problem of resource allocation is universal as every nation has to tackle the issue of determining what, how and for whom goods and services will be produced. In Figure 2.1 we begin our presentation of the economic systems of the world by introducing two extremes: the free market model and the centrally planned model (along with two exemplar nations).
Figure 2.1 A spectrum of economic systems
On the extreme right-hand side of the diagram is the free market model, and on the extreme