Allocation of Resources

Any process which allocates resources must be able to answer three basic economic questions:

1. What goods will be produced and in what quantities?

2. How will resources be combined to produce the goods?

3. For whom are the goods produced? How much of each good will each consumer get?

The what question is a question of what to produce and in what amount.

Recall that resources have alternative uses, meaning that land, labor, capital, and entrepreneurship in one combination can be used to produce shower curtains; in another, bubble gum; and in yet another, physical education instructors.

Somehow, every society must determine which of all the many possible goods will be produced with the limited resources. All that society wants of each good cannot be produced; therefore, the society is forced into choice. Not only must the society choose what is to be produced, but the particular quantity of each good as well. Decisions have to be made whether to produce wedding rings or not, tanks or not, and if so, what quantity of wedding rings, what quantity of tanks, and what quantity of all other goods. The answers to the what question become society’s shopping list.

The how question is basically a question of production. How is each good to be produced? Which resources are to be used up in the production of the good and which method of production, the technology, will be employed? A labor-intensive method using much labor and little capital is one alternative; a capital-intensive method is another. A farm may be cultivated with a lot of hired help, or much labor can be replaced by a tractor.

The for whom question is a question of allocation. Who will consume the goods created by answering the two previous questions? There are many potential ways to allocate, ranging from an equal share for everyone, to each according to his or her contribution. There is no “right” method. The allocation method that is selected will reflect the values of the society.

The combined answers to these questions is called the allocation of resources or resource allocation.