Can You Explain The Allocative Mechanism Of Market Economy?


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Muhammad Abdullah786 Profile
The allocation of resources for the production of different goods takes place via the sale of resources by their owners. The owners possess the land, labor, capital and entrepreneurial capabilities. In which use of a resources owner will allocate his resources is the basic function of market economy. If he is labor he will allocate his services in those uses where he gets higher wages. If he is possessing land, he will give it over to those persons who give him more rent. The producer entrepreneurs will launch those projects where they get higher profits. In nutshell the ages, rent, interest and profits are the prices which serve as signals in connection with the allocation of resources in different fields and sectors of the economy.

Every society wants to produce a package of goods. Such package may include consumer goods as well as producer goods. The consumer goods directly satisfy human wants while the capital goods are used for the production of further goods. It is the market mechanism which guides which goods will produces and in how much quantity they will be produced. In other words, it is the market system which performs the function of allocation of scarce resources in the consumer goods industries or in the capital goods industries. It is the framework of revenue, costs and then profits which guides the producers regarding the determination of size and consumption of goods produced in the economy.

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