How Well Do Markets Allocate Resources

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How well do markets allocate resources and distribute output in society? I would like to start my final exam paper from generalization: the word economy comes from the Greek word for “one who manages a household.” At first, this origin might seem odd. But, in fact, households and economies have much in common. A family faces many decisions. It must decide which members of the family do which tasks and what each member gets in return: Who cooks dinner? Who does the laundry? Who gets to choose what TV channel to watch? In short, the household must allocate its scarce resources among its various members, taking into account each member’s abilities, efforts, and desires. Like a family, a society faces many decisions. A society must decide what jobs will be done and who will do them. It needs some people to grow animals, other people to make clothing, and still others to design computer software. Once society has allocated people (as well as land, buildings, and machines) to various jobs, it must also allocate the output of goods and services that they produce. It must decide who will eat oysters and who will eat rise. It must decide who will drive a BMW and who will take the bus. The decision-making process, allocation, I will summarize by three questions: What? How? For Whom? The first question which must be answered is: What goods and services should be produced? Should we produce croissants or bread? Laptops or motorcycles? Space shuttles or screwdrivers? This question “What?” is important because resources are limited but what people wants is unlimited. Here we have problem of supply and demand. There are different markets which determined by supply and demand. Demand refers to how much quantity of a product or service is desired by buyers at a certain price. Supply refers to how much the market can offer. The quantity supplied refers to the amount of a
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