Question: Explain the role of the cost machinery in allocating resources in an economy

As resource are scarce relative to the clamorous demands of homo wants, economies are concerned with basic questions of allocation. The gratuitous market cost mechanism (is the forces of demand and supply) answers the questions of- What and how much to produce? For whom to produce? How to produce?

In a market, resources are allocated based on the demand/supply in which prices plays an signalling part every bit it allocates resources to the production of different types of appurtenances. It as well acts as signalling machinery betwixt buyers and sellers; telling them how much and what to produce.

What and how much to produce?

Resources are limited and cannot produce enough goods and services to satisfy human wants which are unlimited.
The economy must brand a choice on the types of appurtenances and services that it wants to make available to the country. For example, an economy has to decide on the different types of goods to produce, adamant jointly by producers and consumers through the signalling function of prices and their cocky-interest. Cost shows how much consumers are willing and able to pay, signalled by the demand curve. How much producers are willing and able to produce, is shown by supply curve

In this manner, the cost acts every bit a bespeak telling the producers what to produce and how much of the adept to produce.

Price and Demand diagram

Thus determines the allotment of resources amidst various appurtenances. If  market is in disequilibrium, the marketplace will adapt until equilibrium cost and quantity achieved a satisfaction of both buyers and sellers maximised. For example, when Qd < Qs for rice, ceteris paribus, a shortage results. There will exist upward pressure on the price and the price increase will point an increment in profit which leads to a reallocation of resource into the production of that expert.

For whom to produce?

Cost mechanism likewise shows who to produce these resources for. This is shown by the demand curve which signifies consumers' willingness and ability to pay. In a way information technology represents their economic dollar votes and shows that producers should produce for these consumers.

Resources are scarce, no social club can satisfy all the wants of its people.
How the express supply of final goods/services produced is allocated among people?
Price acts as a mechanism in a market economy and distributes the output simply to people who are able and willing to pay for the good.

This in turn depends on the purchasing ability and the value that people place on the good. C onsumers pay and consume appurtenances to maximise consumer welfare while producer try to maximise profits.Using the DD/SS diagram above, the equilibrium output at Qe volition be allocated to consumers who are willing and able to pay at least the equilibrium cost which is prepare at Pe.

How to produce?

Prices of resources and factors of product also address the question ofhow to produce various goods and services. An economy can choose to produce using use various factors of product like labour (homo) or capital (machines). Price of resource should guide firms' production methods and firms choose resources that are cheapest and incur the everyman opportunity cost.

In the factor market the producers need for resource and the consumers are factor owners that supply the resources.The allotment of resource amongst the competing uses is based on the prices of the resources.

For instance, a manufactured good can either be produced by capital intensive methods (where there is little use of labour and greater use of machines) which are more efficiency or labour intensive methods (where greater use is made of labour).

A business firm'south main aim is to reduce the price of production equally guided by relative prices of factors of production. In countries like China, where resources like Land and LABOUR are arable, they tend to be engaged in labor intensive production due to and it is easier to produce using such methods.