1.2: The Allocation of Resources

• Households as consumers


  Make choices about how they allocate their scarce resources
• Households as factor service suppliers

  Supply labour
• Firms


  Make choices about which goods and services to produce and how much to produce
• Government


  Makes decisions about taxation and government spending
• Incentive for households as consumers

  - Utility

  - Want as much satisfaction as possible
• Incentive for households as factor service suppliers

  Income
• Incentive for firms


  Profit maximisation
• Incentive for governments


  - Stability

  - Want to produce: a stable environment for firms and households to pursue objectives, sustainable environmental policies, policies to influence resource allocation and policies to ensure macroeconomic stability
• Effectiveness of incentives


  - Economic agents may face conflicting incentives

  - May not be impacted by incentives

  - May not bring about the best possible result
• Market economies


  - All factors of production are privately owned

  - Self-interest is the only motivation

  - Resources are allocated through market forces (interactions between buyers and sellers)

  - Prices and the operation of price mechanism create incentives that direct resources to where they are most needed

  - Government plays no role in resource allocation

  - Government must still provide a basic legal framework
• Command economies


  - Government takes on role of coordinating resource allocation

  - Resources are controlled and allocated by state controlled planning boards according to the politicians' and planners' view of national need

  - All businesses are state owned enterprises
• Mixed economies


  - Resources are allocated through a combination of market forces and government direction

  - Government direction may take the form of direct intervention in the production process (e.g. through indirect taxation)

  - Both public and private sectors exist and play an important part in deciding what is produced, how it is produced and who it is produced for