Macroeconomic Activity

Resource Allocation

We have now established that in Economics we are interested in the way in which the economy is structured, and how that structure is applied to answer the three “big questions” of Economics:

1.    What will we produce?

2.    How will we produce it?

3.    Who will get the things that we produce?

These questions lead us to an assessment of resource allocation.  Given that our resources (land, labour, capital and enterprise) are all scarce, how can we use our available resources to help us to achieve the highest possible standard of living?

The answer is that we must learn to allocate our resources in a way that is considered efficient.  Economists distinguish between a number of different types of efficiency.  While this is not a complete list, some of the types of efficiency with which you should be familiar are:

1. Productive (or Technical) efficiency: This is perhaps the easiest type of efficiency to understand. In this instance, we are interested in ensuring that any time we produce a good or service we are able to do so by using the smallest number of resources. If I use a tree to make four cricket bats, and you can produce five cricket bats from a tree of the same size, then your productive efficiency is better than mine.
   
   
2. Allocative efficiency: In this case, we are also aiming to ensure that the resources that we have are used in a satisfactory manner. That is, we want to produce those things most desired by the community first. This is a problem experienced by many of the world's poorer countries, especially those which suffer from poor governance. Corrupt leaders will often use a countries scarce resources to provide elaborate palaces, rather than ensuring that their people have access to clean drinking water. This is very poor allocative efficiency.
3. Dynamic efficiency: In the modern world it is important that firms are able to respond quickly to changing economic circumstances. To be dynamically efficient means that firms are aware of the changing circumstances, and they are able to adapt to meet those new needs. For example, as technology has improved, many businesses have elected to adopt computers. This has involved buying the hardware, choosing the correct software and training the staff. In going through this process, the firm is demonstrating their dynamic efficiency.
4. Inter-temporal efficiency: There is a balance to be found between what we will need now, and what we will need in the future. If we use up all of our resources now there will be a smaller number of resources for a larger population – and this is not a desirable situation! The government aims to ensure that this balance is met. For example, in Victoria the government has recognised that it takes 100 years for an area of forest that has been logged to regenerate. To achieve inter-temporal efficiency, only 1% of the available land can legally be logged in any one year.

However, although we recognise different types of efficiency, it is often difficult to assess our performance in relation to each. As such, measures of efficiency do not distinguish between which “type” is being achieved. However, we can say that our goal is to achieve the “best use” of the productive resources that we have available to us.