Essay On Allocation of Resources
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In last phases of the twentieth century, economist who belonged to the self-interest school of thought expounded how invisible was controlling the economic behaviour. This idea currently underpins the structural components of the rational market, which is free of coercions and constraints[ Mankiw, N. Gregory, and Robert B. Harris. Principles of Microeconomics. Fort Worth, TX.: Dryden Press, 1998.
]. The idea originated from Adam’s book Wealth of Nations in the eighteenth century. These ideas draws assumptions on how the human behaviour impacts on the thinking processes. Every investor or business person would like to gain profit from their capital. In economic science, resources are limited while, on the other hand, the demands become unlimited. This essay tries to discuss how scarce resources can be distributed efficiently in the market. This is in a situation where supply and demand plays an important role in determining the allocation activities[ Wible, James R. The Economics of Science Methodology and Epistemology as If Economics Really Mattered. London: Routledge, 1998.
Invisible Hand and allocation of resources
Invisible hand can be regarded as a natural feeling in humans that encourage their behaviour. However, according to Adam Smith, these are natural forces, which trigger the market price. These forces are controlled by self-interest, supply and demand and competition. In this case, the government plays limited or no role at all in determining the market prices. In economic terms, each of the party will try to maximize their self-interest and this interaction will create an exchange of goods and services. With the existence of competition, the supply and demand curve is affected, which end ups creating a market price referred to as equilibrium price.
The effect of the invisible hand in the allocation of resources is a situation in which these resources are used efficiently. A free market is defined as a condition in which there exist no influence from the government in the transaction within a private company. This is inclusive of perfect information and competition. Since there exists perfect information in the market, the producer is in a position to see a signal from the consumer by the fluctuation of the market price[ Wible, James R. The Economics of Science Methodology and Epistemology as If Economics Really Mattered. London: Routledge, 1998.]. The producer will be in a position to allocate appropriate resources in order to bring consumer experience. The quantity of the product can be changed by allocation of resources to increase the effectiveness of the economic activities. This is attributed to the role played by both sellers and buyers as price determinants. The allocation of resources is optimal when total welfare of buyers and sellers is maximized. This is in the situation in which the marginal benefits equates to marginal costs.
Marginal benefit refers to additional benefit accrued from one item that is consumed. The more goods are consumed, the lower the satisfaction level of these items. On the other hand, marginal cost is that additional cost that is required to make more output. Allocation of resources is optimal when the welfare of each party is taken into account. The market force is in a position to allocate these resources optimally. However, this is applicable in specific circumstances in which there is predominant economic climate. If this idea find an application in developing countries, many people will end up jobless since the capitalists will try to pool resources and terminate some labour. In a free market, there will be an agglomeration of producers since the operations are fair[ Warsh, David. Knowledge and the Wealth of Nations: A Story of Economic Discovery. New York: W.W. Norton, 2006.
]. The effect of this is that producers will not be in a position to make profit leading to collusion. The resources cannot be allocated efficiently by an invisible hand due to market failure. This failure arises from externalities, public goods, and non-competition.
Externalities refer to a situation in which production and consumption of goods influence on existing market prices. Public goods contribute to market failure since these goods are consumed by one party. This results to market failure since the producers will not entirely make one product that will not bring profit. This makes it difficult to allocate resources. The solution to this is by government intervention, in which the government provides for goods and financing is achieved from the tax. In the real world, there exists no perfect competition. Imperfect competition, on the other hand, will make the allocation of the resources inefficient since the producers will set their own prices in order to make high profits[ Wible, James R. The Economics of Science Methodology and Epistemology as If Economics Really Mattered. London: Routledge, 1998.
This is from the realization there exists little competition.
The allocation of resources refers how to individuals or companies distribute the inputs within an economic marketplace. Traditionally these inputs include; labour, capital and land. Entrepreneurship and sole proprietorship is inclusive in this category since they play an important role in the allocation of resources. Invisible hand plays a dominant role in resource allocation, in a free market. Allocation of these resources arises from competition, self-interests and interplay of supply and demand. Individual companies distribute resources through the act of self-regulation by using the inputs that are needed and selling out the remnants resources. Through effective allocation of resources, the market for products grow since companies are in a position to access these resources for production.
Each input plays an important role in the market place. The economic resource include buildings or necessary equipment that is needed in the production of consumer goods. Labour is used to transform these resources to goods and services. Capital is the money that has been acquired from the sale of these goods and services. The idea of the invisible hand is that the market mechanism arises from natural selection. Many economists argue on signalling role in price determination and its influence in resource allocation. Self-interest, which feature in the invisible hand contribute to desirable force in resource allocation. The later predecessors have encapsulated the mathematical model in which prices rises and falls reflecting the surpluses and scarcities[ Medema, Steven G. The Hesitant Hand: Taming Self-Interest in the History of Economic Ideas. Princeton, N.J.: Princeton University Press, 2009]. Desirable outcome is only achieved in a competitive market only when distribution of resources has been done accordingly. In this case, there is an underpinning of laissez faire approach in market economies[ Mankiw, N. Gregory, and Robert B. Harris. Principles of Microeconomics. Fort Worth, TX.: Dryden Press, 1998.
]. The invisible hand requires some activities if the consequences are to be realized. They require a competitive market which it is not ideal since the economies of scale dictate few producers.
Many opinions have been developed on how the invisible hand plays a role in distribution and allocation of resources. However, this works for a certain condition, and it is not effective in the case of market failure. This concept also take a long duration of time to reach at the appropriate price where the resources have been used optimally. On the other hand, when the visible hand comes into play the processes of setting the prices is relatively faster than the one of the invisible hand. The nature of many businesses that are run by a single company do not allow invisible hand to work perfectly since it leads to imperfect competition. This can only be solved through government intervention, which arises from visible hand. This is achievable since the management can control the production rather than the market force to determine the price.
Mankiw, N. Gregory, and Robert B. Harris. Principles of Microeconomics. Fort Worth, TX.: Dryden Press, 1998.
Medema, Steven G. The Hesitant Hand: Taming Self-Interest in the History of Economic Ideas. Princeton, N.J.: Princeton University Press, 2009.
Warsh, David. Knowledge and the Wealth of Nations: A Story of Economic Discovery. New York: W.W. Norton, 2006.
Wible, James R. The Economics of Science Methodology and Epistemology as If Economics Really Mattered. London: Routledge, 1998.