Compare And Contrast Two Alternative Systems Of Resource Allocation In The Economy

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Compare And Contrast Two Alternative Systems Of Resource Allocation In The Economy

Economics can be said to be the science which studies the relationship between scarce resources, with alternative uses, and consumers’ unlimited wants. Therefore the ‘problem’ of resource allocation can be seen to be central to the basic economic problem. In this way , how resources are allocated throughout an economy is of great importance and different types of economies employ different methods to achieve this allocation.

All economies have this same basic economic problem of ‘what’ to produce, ‘how’ to produce it, and ‘for whom’ to produce it. Deciding what to produce involves choosing a certain allocation of resources, in order to produce a
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The demand for beef has shifted from to, this shift causes the quantity demanded at price to fall from to. This creates a surplus of unwanted beef which can only be sold if prices fall to. Also, the shift in demand for pork, from to causes quantity demanded at price to rise from. This leads to a shortage of pork, which can combated by raising prices to ration resources.

Pork will now become a relatively expensive, scarce commodity, in comparison with the glut of cheaper beef. Producers see this and so resources will be reallocated into the production of pork, because it has become a relatively profitable market, due to the change in its market price. At the same time, beef becomes relatively ‘unattractive’ to producers, because of the fall in price, leading to cuts in profits, which in turn urges producers to reallocate resources out of beef production. As less resources are allocated to beef production, so the glut will disappear, and its market price will begin to rise again. In the same way, as more resources are allocated to pork production, so the good becomes no longer scarce and prices and profits will diminish as more producers move into the market.

These price fluctuations and resource reallocations continue until beef profits have risen and pork profits diminished to a level at which it no longer pays the producers to reallocate resources from beef production to pork production. Therefore in the free-market,…