Question

•  How do individuals allocate scarce resources? (How do people make choices?)

•  How do markets allocate scarce resources?

•  Is market allocation desirable?

Answer 1

1.

Individuals allocate scarce resources on the basis of equi-marginal principle and make their choices. Here, each individual identifies marginal utility of the each product and service divided by the price. It gives marginal utility per dollar of that product. Now, any product or service, that gives highest level of  marginal utility per dollar, will be purchased & consumed by using the resource. Now, the next highest level of  marginal utility per dollar of the product will be identified and consumed. It will help maximize the utility while using the scarce resources. It gives highest level of satisfaction and utility by using resources.

2.

Market allocate resources on the basis marginal productivity of the factors of production divided by the price of the factors of production. Now, a combination is selected, where MPL per dollar becomes equal to the MPK per dollar spent. It helps to achieve efficient utilization of resources.

3.

Market Allocation is desirable, because it increases the efficiency and benefits to the parties involved. But, the market should be competitive to achieve the efficiency. If it is monopolized, then market allocation will not be efficient.