Systems%20of%20resource%20allocation

1
Systems of resource allocation

• Economists identify three basic types of
  economic organizationi.e., systems for
  determining what gets produced, how it gets
  produced, and who gets what
• Traditional economy
• Command or centrally planned economy
• Market economy

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Traditional Economy

1. Resources are allocated according to
   long-established practices.
2. Methods of production tend to be unchanging.
3. 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).