Way to Get Efficient Allocation of Recourses - Essay Example

According to McConnel and Brue (2005, p. 62), "market is a mechanism that brings buyers (demanders) and sellers (suppliers) into contact. A market system is necessary to convey the decisions made by buyers and sellers of products and resources".

Independent economies and enterprise organizations from a private sector, and the state forms the public sector. In spite of the fact that the market is self-regulated, the state takes measures on its regulation: establishes a marginal level of the prices for certain goods and services, a minimum level of wages, limits competition in the separate markets, etc.

Buyers form the demand for goods and services. Hence, constantly increasing needs form the demand. In economic theory, there is a standard definition of demand. Demand is the ability and desire to purchase goods and services. It is influenced by some factors (non-price factors): tastes and preferences of consumers, the number of buyers in the market, the prices for the goods-substitutes, and a level of income of buyers, consumer expectations concerning the future prices, income, and presence of goods.
The price of the goods and the quantity of demand for these goods are inversely proportional quantities. Economists name this the law of demand. That is the higher the price of the product, the less the consumer will demand with other things being equal.

Demand Curve
Manufacturers make the goods and services, which they consider it is possible to sell in the market. Set of commodity producers provides to people the satisfaction of their solvent demand, that is forms the supply. The supply is the desire and ability of manufacturers to give the goods for sale in the market. The ability to give the goods is connected with the use of limited resources, which are not always enough to satisfy the needs of all people. Thus, the supply is a quantity of the goods and services, which a seller wishes and is able to sell. That is the law of supply states, the higher the price, the larger the quantity supplied, all other things constant.
Supply Curve

Thus, in the market, on the one hand, there are manufacturers from the side of supply and consumers from the side of demand. So, the intersection of the demand curve D and the supply curve S represents the equilibrium price Pe where a quantity Qe of commodities will be sold. Changes in the market (moving curves D or S to the left or the right) will change the equilibrium price.

So, the market price, at which the supply of an item equals the quantity demanded, is called an equilibrium price. “Equilibrium price and/or equilibrium quantity change when the market demand and/or market supply curves shift. Equilibrium price and equilibrium quantity both rise when there is an increase in market demand with no change in the market supply curve. Equilibrium price falls while equilibrium quantity increases when market supply increases and demand is unchanged” (Salvatore, 2003, p.18).

Generally, in a market system, they allocate two basic types of markets: the market of resources and the market of products. Interaction of these two markets describes the model of circulation of resources, products, and income. Economies give the resources (the ground, work, capital, enterprise ability) to the enterprises on the market of resources and receive for them the monetary income (wages, rent, percent, and profit). At the same time, economies spend the earned income in the market of products for the purchase of the goods and services of the enterprise. In turn, the enterprises get the resources given by economies in the market of resources and therefore incur some costs. To the market of products, enterprises give the goods and services, receiving incomes from their sale. Thus, the prices for resources are formed in the resource market as a result of the supply of the economies and the demand of enterprises.

So, let us see to what extent we may agree with the assertion that markets ate best – if not only – way to bring about an efficient allocation of resources? According to Wade, (2004, p. 10) “The necessary institutional arrangements for generating efficient resource use are competitive markets, particularly domestic markets integrated with international markets. Hence government should leave private producers operating through market mechanisms to supply all but certain “public” goods. It should limit its own activities to improving the functioning of markets and to provide only those goods and services where the government has a clear comparative advantage relative to private agents. The resources so released can either be transferred to the private sector or used to improve the performance of the state's essential functions”. Tresch (2002, p. 14) states, "if conditions are right, competitive markets generate an efficient allocation of resources. The problem for a market economy is that the conditions or assumptions underlying a perfectly functioning market system are far too strong".

To my opinion, the only way to get a really efficient allocation of recourses is to combine and to use all the attractions, possibilities, and favorable advantages of both market and government. Here I agree with Yūjirō Hayami (2001, p. 224), who claims, “If the market can achieve a socially desirable allocation of resources, there should be no need for government to coercively intervene in economic activities. However, the market is not able to achieve optimality in all economic activities. Divergence of market equilibrium from the point of Marshallian net utility maximization or Pareto optimality is called market failure Government activities are needed to correct this failure”.





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