How are resources efficiently allocated?

2 Answers

pohnpei397's profile pic

pohnpei397 | College Teacher | (Level 3) Distinguished Educator

Posted on

According to economists, resources are efficiently allocated by competitive markets.  Economists say that efficient allocation happens when consumers are able to choose the goods and services that they want.  This is how things happen in a market economy where consumers buy what they want and do not buy what they don't want. When this happens, companies who sell desirable products thrive and resources move to them.  Companies that do not sell desirable products decline and fail and resources move away from them.  In these ways, resources move to those firms that make the things that people want.  This is efficient allocation of resources.

rachaely123's profile pic

rachaely123 | Middle School Teacher | (Level 2) eNoter

Posted on

Resources are being allocated efficiently when they are being used to produce the proper quantities of the goods and services that consumers desire the most. This requires that each product be produced up to the point at which price is equal to marginal cost. When that occurs, the value of the last unit of output produced is exactly equal to the value of the alternative goods that must be sacrificed for its production. In easier terms, allocative efficiency requires that we produce each product up to the point where the benefit it conveys to society (marginal social benefit) equals the costs its production imposes on society (marginal social cost). This occurs at the output where the market supply curve crosses the market demand curve (if we assume that these curves reflect all of the costs and benefits associated with the production and consumption of the product).