a) Explain how different economic systems attempt to allocate scarce resources. Outline the economic system of the UK.
The allocation of resources is an economic theory concerned with the discovery of how nations, companies or individuals distribute economic resources or inputs in the economic marketplace. Traditional business inputs are land, labour and capital.
There are three major systems that can be distinguished in many parts of the world economy within these basic models there will be a range of variations and differences.
Planned (Command) Economy
An economy where supply and price are regulated by the government rather than market forces. Government planners decide which goods and services are produced and how they are distributed. Typically associated with a socialist or communist country. The means of production are publicly owned in the form of state control or as a collective ownership and various committees make decisions regarding their use. The government owns scarce resources and all economic decisions related to the allocation of resources and investment is under the control of an authoritative body (i.e. government). There is a market for consumer goods and labour but very often the consumers do not have the choice to spend their money in a way they would like as the state sets production targets and growth rates according to its own view of people’s wants. Income and wealth distribution is decided by the state, therefore market prices have little part in informing resource allocation decisions and queuing rations for scarce goods. Advantages
• Duplication of resources can be eliminated
• More control to achieve goals of economic and social well-being • No inflation as prices are controlled
• Very low unemployment levels
• Loss of independence and free choice
• Lack of variety and quality of goods and services available for consumers • Extreme administration and supervision levels result in high outlay costs combined with slow decision making • The absence of the profit motive results in lack of individual effort and enterprise. • Disruptive if government policies change too frequently
Market Economy (Free enterprise)
Households (buyer) and the producer (seller) decide about the future of the goods to be produced without the intervention of the government. Output is determined by the consumer and is based on a household’s income and by the way in which they distribute their spending between the alternatives on offer. Producers will try to persuade consumers to purchase goods through marketing and branding. The price of goods offered by producers will depend on their production costs, which in turn are driven by the relative scarcity of the various resources needed to produce a product. Free-markets allocate resources through the workings of the price mechanism where prices are set by the interchange of supply and demand, with the resulting prices being understood as indicators that are communicated between producers and consumers and serve to guide the production and distribution of resources. Through the free price system, supplies are rationed, income is distributed, and resources are allocated. A free market leads to automatic adjustments to changes in economic conditions; the prospect of monopoly/oligopoly profits may stimulate risk taking and hence research and development and innovation, and this advantage may outweigh any problems of resource misallocation; there may still be a high degree of actual or potential competition under monopoly and oligopoly. The interests of consumers and producers will conflict as producers seek to make profits from goods sold and consumers want to pay low prices. However, the free-market system serves to strike a balance with profit levels matching the strength of consumer preferences and the scarcity of resources. Advantages
• Production reflects consumer demands
• Flexibility in responding to different conditions of...