introduce us to some crucial questions facing all societies. If resources are
scarce and have alternative uses, how do the combinations of capital and
consumer goods reflected as points on the production possibilities curve, which
combination should the society choose? How does the society decide how many
units of capital goods and consumer goods to product given its unlimited
resources?
achieved, then we must be concerned about how to produce whatever quantities of
capital and consumer goods society has decide to have. Are we going to use
labor-intensive or labor-saving technology? For efficiency, the “how of
production” must be such as yield the least cost to society? Finally, given
that society knows what and how to produce, how it sorts out the problem of
distributing the goods (and services) produced to the consumer? Who get what?
How do we ensure that the goods get into the hands of those who need them?
trade-off some consumption goods for capital goods and vice versa. But with
economic growth, it is possible to consume more of both goods. Economic growth
implies a rightward shift in the production possibilities frontier, e.g., from AB
to A1B1 below. In panel I, the shift reflects an increase
in the capacity to produce both consumer and capital goods. In practice, the
society might find greater capacity to produce some goods than others. In panel
II, the increase in the capacity to produce capital goods is greater than the
increase in the capacity to produce consumption goods. The opposite is the case
in panel III. Economic growth, in whichever of the three ways represented
below, implies that society can now enjoy more goods and services than
previously.
society alone to answer, nor are they limited to the sphere of the individual
business firm. Consider, for example the individual student. Which of the
numerous professions should he/she acquires training in? Should he enroll in a
course in law, Agriculture, or engineering? What should he train to produce?
Supposing he decides to acquire training in engineering, how should he go about
if? Should he attend a university of polytechnic or a vocational institution?
Should he take a part-time or full-time programmed? Then, assuming he is now a
qualified engineer, for whom should he produce? To whom or what organization
should he offer his service?
It is evident that the above questions are the central
issues in resource allocation; they specifically bother on how resources should
be allocated to their various uses in order to achieve the maximum possible
benefits (for the society, the firm and the individual). For a society to
function effectively there has to be a system of allocating scare resources, a
system that determines what, how and for whom to produce. There are two extreme systems of resource
allocation; one in which the market is left to answer the above questions and
the other in which the government takes absolute control in deciding what, how
and for whom to produce. In between these two extremes are a host of systems.
In chapter four, we would be considering some of these systems. However, for
the present, we would turn our attention to the first: the market system