ALLOCATE

In economics, the idea of allocation is directly related to the ideas of demand and scarcity. Generally speaking, consumers' demands usually exceed the resources that society has available to satisfy those demands. Moreover, western economists largely agree that while people's desires are, by nature, unlimited; the resources available to meet those desires are limited. The economy or marketplace must therefore find a way to "decide" which resources should be allocated to meet particular consumer desires.

The term allocation refers to the efficient distribution of a society's economic assets (capital, raw materials, human resources) to satisfy the demands of consumers for various products and services. An example of an economy where resources are allocated inefficiently could be a marketplace in which television manufacturers made many more black-and-white televisions, (which consumers do not want) than color televisions (which consumers do want).

In an economy like that of the United States, however, resources are usually allocated efficiently. If consumer demand for seventeen-inch computer monitors, for example, grows stronger, the marketplace will automatically transfer the resources and materials away from other uses to meet that demand. Taking a cue from the prices that consumers are willing to pay, the marketplace "knows" when to begin making more seventeen-inch monitors and fewer fifteen-inch monitors. Consumer demand for seventeen-inch monitors increase if consumers are willing to pay more for a seventeen-inch monitor than they would have in the past. When companies realize that, they can make more profit for seventeen-inch monitors than they were able to in the past; in turn, companies allocate their resources to make more seventeen-inch monitors to meet the changing demand.

The Scottish economist Adam Smith (1723–90) is credited with being the first to explain how the changing preferences of individual self-interested consumers could, like an "invisible hand," force the marketplace to spontaneously and efficiently reallocate resources to meet consumer demand. Even at the inception of a U.S. economy, technological advances and changing consumer demand has forced the marketplace to allocate resources away from once popular products to new uses. Wooden teeth, hoop skirts, flintlock rifles, steam locomotives, gas lamps, vacuum tube radios, and 78 RPM phonograph records are only a few of the thousands of the once-commonplace goods that vanished from the market because the economy's productive assets were reallocated to different products.