Saturday, February 5, 2011

Distribution and Allocation

On the off chance that this blog attracts readers who haven't read a lot about economics before, I thought I'd try, at least once a day, to do a post about the terms I'll be using on the blog.

Two big ones that sometimes confuse people (even those pretty well versed in economics) are the concepts of Distribution vs. Allocation.

Though I don't generally recommend that people get information about economics from wikipedia (there is a huge amount of false or misleading information on wikipedia economics pages) the wikipedia entries on Distribution(economics) and Allocation of Resources do a decent job of explaining what these concepts mean.

If you want the Short version, allocation has to do with economic inputs (production), while distribution has to do with economics outputs (consumption.)

Take yourself, for example. If you are like most people, your input into the economic system primarily takes the form of your labor (if you work full time, that's about 2000 hours of labor per year). The price system directs you (though it does not force you) towards jobs that pay more.

Meanwhile, you use the pay you get from your inputs to purchase economic outputs like food, clothes and shelter - that's the distribution side.

In this way the price system ensures that the outputs you extract from the economic system are similar to your inputs. Not exactly the same, though... but that's a discussion for a future post.

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