Allocation of Resources:
Economic decisions about the uses which should be made of land, labour and capital leading to an overall allocation of resources, which generally matches the pattern of consumer demand. Consumer demand creates profitable opportunities for entrepreneurs to organise inputs of factors of production so as to meet that demand. In this way the allocation of resources responds to the pattern of demand exhibited by consumers.
However, the idea of the allocation of resources can be applied much more widely to a range of decisions which may be taken by individuals or by governments.
• People decide how to allocate their own resources when they choose between work and leisure or whether to save more or consume more.
• Governments make resource allocation decisions when they consider making changes to different categories of spending: they may consider whether to allocate more towards defence or education or towards health care or unemployment benefit.
It is not always the case that the allocation of resources conforms to the pattern of consumer demand. Firms and governments can sometimes control certain aspects of the allocation of resources through monopoly power or through administrative decisions.
Where this happens, there is said to be a distortion of the allocation of resources so that it does not accurately reflect consumer preferences.