Profitability in Sync with Efficient Allocation - Essay Example

Profitability in Sync with Efficient Allocation Before moving on to the main concern, let’s just have an introduction with the lone words and see how they are related to each other. Economy also known as economic activity composes of production, distribution and utilization of different commodities (goods and services) by different types of individuals, groups or organizations in given geographical vicinity. Formerly economic activity was conjectured to be bounded by natural resources, capital and labor. This sight disregard the value of technology (automation, reduction in cost or increased productivity) and creativity, for instance, market/product penetration, product development, conglomeration or diversity which fabricate trade mark or patent . Moving on, this economy is further categorized in three separate systems, namely Market, Planned and Mixed economy. Since, market economy is the focus of our essay; here is a brief description of planned and mixed economy. Planned or Command economy refers to that economic system where the three basic question of economics (described later) are plan centrally rather than permit private producers and consumer to have any say in the decision, similarly, all resources are also owned by the state which results in monopoly. On the other hand, countries with mixed economic system have allowed firms and individual in the private sector to own the scarce resources with the objective to earn higher profits, nonetheless, public sector or state also owns resources to produce goods and services which they think people needs, for instance, water, food or defense. Coming to the three basic economic questions, which also direct agencies in different economies on allocation of resources are what to produce, how to produce and for whom to produce. What to produce? One problem faced by the producer when there is scarcity is to decide what exactly to make and which want of the people is to be satisfied first. Now that it is decided that what to produce, second questions come into play. This question deals with the decision of choosing tools, land, workers and how much to invest. When first and second question are answered, a final problem remains that is for whom do we produce? Since, scarcity still prevails it must be decided who gets the manufactured goods the rich, poor, hardworking or lazy ones? Hence,producer should make segments and then target a segment within the segments to allocate resources efficiently. As it is mentioned before, market economy is topic’s focal point so it will be discussed in length. Market or free economy is an economy where decision such as investing, producing and distributing depends on the forces of demand and supply. Likewise, the fee of commodity is conditioned by free price system.The main objective or in other form, characteristic of a free market economy is achieving ever increasing profits. The three fundamental questions, if answered through the eyes of a market system, will have very separate response if compared to that of the other economies. Allocation of resources in this kind of economy is very dissimilar to other systems and it is needed to be seen that the profit this economy earns is able to help achieve efficient allotment and use of resources? In the modern market economy, the underlying task of the market to the resource allocation is displayed by the effect on the enterprise by the market system. As a kind of foundation, venture is a way of resource allocation with the benefits of dealing the cost and increasing productivity, hence, increasing productivity (Li-Sheng, 2004). Of course when the profits are high, it indicates that there is a strong demand in the market for that product or service, therefore, organization in the market economy will use that profit to allocate resource which will help them manufacture the goods or make service available at the wider platform. The running market needs owners, organization and government to depend on each other and work together to optimize and promote each other, resulting in profit maximization (Li-Sheng, 2004). Though market economy does mean full private ownership but little intervention from government can help them to increase profit and use them to allocate resources. For example, a company makes a product which needs water and the department of water and sewerage is under government, a business having balance and valued relation with them have more chances of getting subsidy - decrease in cost of productionand increased profit, and this profit can help them getting resources in abundance from other private firms. Among the many questions regarding the acquisition of capital, the subsequent is said to be the most significant. According to which rubrics should alternatives between direct and indirect processes of production be fixed on, that is, when it can be said that it’smethodical to store today so that consumption can be increased for tomorrow? Behind an effective state there is usually a price system but this is not enough for increasing consumption and does not allow for investment and capital accumulation. To be efficient in allocation of resources, capitalist production mode seems more likely, because there the profits are used or reinvested on those commodities that satisfy the want of the audience - who are able and willing to buy the product, hence, resources are used more in abundance and a cycle is started of gaining higher profits and using them for reallocation of the resources which help produce the desired good (Malinvaud, 1953). Furthermore, its common sense that business owners want to get the most profit out of their resources but that should not be a full stop for them. Looking out for more opportunities and way to make profit is also recommended and required in this fast pacing world. Profit can play a crucial role in efficient allocation of resources, if new products or services are unveiled with those profits and resources are allocated in such a way that the business is able to meet the ever-growing and new demand from the consumers. For instance, you are in a business of providing typical western or to be more specific American foods such as, steak, bacon, salmon and B-B-Q and you are making quite aprofit, but you observe a growing demand for Italian foods, then you should use the profit you’re making from your current business to use resources to set up a Italian food outlet, thus, like this you are using resources efficiently because you are able to meet the demand of the consumer through profit you earned from your former business. Henceforth, the problem faced by the economic theory is the presence of indivisibility in the production is futility of using the criteria of profitability set on competing prices (Scarf, 1994). To rectify this problem, different and justifying pricing system should be set so that genuine and factual profit figures can be extracted that will give a more correct estimate of how much should be spend on resource allocation. To continue with aforementioned contents, profit is another indicator of telling what to produce, how to produce and for whom to produce. This enables them to use the scarce and scant resources effectively, hence, increasing profits and putting the chain of cycle into action. Besides, the neo – classical assumption rules over the ancient economic text and states that corporation set to maximize profits and that prospective gain drives them to use scarce resources efficiently. In addition to this, higher demands lead to higher market price and act as a stimulus to expand the existing market or emerge into new markets and engage more factors of production or consuming resources. However, it is not necessary that if the company is making profit, it will use the money to efficiently engage the resources, but some time they carry out a cost benefit analysis to watch out the cost and benefit attached with the allocation of the scant resources. If the analysis shows thatusing of the assets and capital is actually disadvantageous to the society, organization does step back from taking any step to allocate the resources. Similarly, if you are making profit you don’t just start allocating resources. First a strong and long study of market has to be done to become aware of the trends, needs and wants of the current time and even predict what will be the pattern of trend in near future. Is it going to continue steadily or at a fast space or will it decline very quickly. If a demand for a particular thing exists in the market then the company should use resources to manufacture the good so that the resources are allocated efficiently and is not wasted, as it is already scarce! To put this all in a nutshell, I must point out that the role of profit in achieving efficient allocation and use of resources is highly crucial because profits do mean money and wealth and if you don’t have the “money” it is very unlikely that you would be able to buy the resources, let alone use it.Examining the before mentioned statement gives a person through and very vast understanding of how does profit actually plays the role. References: Scarf, Herbert E. "The allocation of resources in the presence of indivisibilities." The Journal of Economic Perspectives (1994): 111-128. Malinvaud, Edmond. "Capital accumulation and efficient allocation of resources." Econometrica, Journal of the Econometric Society (1953): 233-268. Li-sheng, H. E. "A Study on the Resource-Allocation Function of the Enterprise and the Government in the Market Economy [J]." Journal of Henan Normal University (Philosophy and Social Sciences Edition) 6 (2004): 021. Kumar, V. Managing Customers for Profit: Strategies to Increase Profits and Build Loyalty. Upper Saddle River, N.J: Wharton School Pub, 2008. Print. McIntosh, Timothy J. The Sector Strategist: Using New Asset Allocation Techniques to Reduce Risk and Improve Investment Returns. Hoboken, N.J: John Wiley & Sons, 2012. Internet resource. Camm, Frank A, Charles E. Phelps, and Peter J. E. Stan. Resource Allocation Under the Cowps Price Guideline: The Case of Fixed Proportions. Santa Monica, CA: RAND, 1981. Print. Read More