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Systems of resource allocation

Systems of resource allocation. Economists identify three basic types of economic organization—i.e., systems for determining what gets produced, how it gets produced, and who gets what: Traditional economy Command or centrally planned economy Market economy. Traditional Economy.

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Systems of resource allocation

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  1. Systems of resource allocation • Economists identify three basic types of economic organization—i.e., systems for determining what gets produced, how it gets produced, and who gets what: • Traditional economy • Command or centrally planned economy • Market economy

  2. Traditional Economy • Resources are allocated according to long-established practices. • Methods of production tend to be unchanging. • Goods and services are distributed based on community views about fairness and justice.

  3. Command or central planning • The planning authorities decide what gets produced--resources are allocated according to planning documents issued by central planning authorities. • The “visible hand” of the planners overrides the “invisible hand” of the market. • Gosplan of the old U.S.S.R. is the classic example of a central planning agency.

  4. The Market System • Resources are allocated though individual decision making. • The market system relies on the choices made by individuals (buyers and sellers) to allocate resources in a socially optimal way. • The economy is an agglomeration of markets, defined as “groups of buyers and sellers with the potential to trade with each other.” • Income distribution is mainly determined by the market value of resources owned (including labor).

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