Resource Allocation

Demand Factors Affecting Australia’s Efficiency in Resource Allocation

The Australian government aims to ensure that we allocate resources in such a way that the standard of living of Australian citizens is maximised. This means that all available resources should be allocated to their best possible use, and that Australians should be able to access the goods and services that result from their use.

As such, when aggregate demand is either too high or too low, this goal will not be achieved. Imagine for a moment that Australia is experiencing weak demand side conditions. At this time the economy may or may not move into recession. However, it is very likely that if weak conditions continue we will see an increase in the rate of unemployment. This is particularly evident in the years following the recession of 1990/91.

Labour is a broad term given to one of the productive resources that we have available to us. When unemployment is above the goal range, it implies that certain resources available to us are remaining idle. As a result, the goal of efficiency in resource allocation is not being achieved in Australia when the unemployment rate is above the NAIRU.

You can learn more about the demand factors which will have an impact on the unemployment rate by clicking here.

Demand factors can also have an impact on the rate of inflation that is evident in Australia. When demand exceeds productive capacity, there is pressure on prices to increase. At these times it is likely that the inflation rate will increase.

With increased rates of inflation it is also probable that resources are once again not being allocated efficiently. If they were, the problem of inflation should not appear! However, we can explore this issue in more depth. When prices rise, it is now less likely that people will purchase certain goods and services. This is particularly true of those things which are considered “wants” rather than needs, and so therefore have a relatively elastic demand curve. In times of rising prices, the quantity of these goods and services demanded may fall. This will lead to reduced demand for labour, and the other resources necessary to produce these products.

As a result of this, the allocation of these resources to the production process will no longer be able to be considered efficient. In other words, any demand factor that will lead to rising prices will also result in a more inefficient allocation of resources.

It is also worth noting that as prices rise, people will tend to use their money for speculative investment. This is when money is invested in an asset in the hope that it will increase in price, and can then be sold for a profit. When people are "speculating" in this way, they are not buying productive assets, and as a result they are not adding to the productive capacity of the economy. In other words, this type of investment does nothing to help the overall economy, and as such this is one of the reasons that the government works to avoid inflation in this country.

You can learn more about the demand factors that will have an impact on the rate of inflation by clicking here.

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