How Are Resources Allocated in a Classical Market Economy - Hong Kong Market Economy - Case Study Example

How are resources allocated in a classical market economy? What are the principles and mechanisms in allocating goods and services in Hong Kong? Name: Institution: A classical market economy focuses on the allocation of resources on the basis of private ownership and decentralized decision makings. In this regard, the private sector is accorded the intellectual property rights to engage in resource allocation and distribution for reasons of boosting the market economy. The essentiality and the core of classical market economy constitute a healthy market competition where producers and consumers have the audacity to exchange goods and services freely. Groups of individuals and private industries take the center stage in making managerial decisions on how products and services can be allocated at a minimal cost1. The private sector enjoys the economic advantage of making a decision about consumers and producers, and this modality play a fundamental role determining forces of demand and supply in the allocation of resources. A classical market economy uses the systems of prices in a bid to ascertain the potentiality of a market economy to incur losses and make huge profits. However, this paper discusses how resources are allocated in a classical market economy. On the same note, the paper presents principles and mechanisms in allocating goods and services in Hong Kong. In a classical market economy, resource allocation is consistent with the fundamental principles of a free market policy in which the production and consumption of goods and services are determined by individuals’ decisions and market forces but not the government. In this context, the private sector evaluates what people spend and the humanities’ financial capability to purchase goods and services. Besides, the fact that private firms and the household sector contribute towards the contextualization of a classical market economy plays a crucial role in understanding the nature and features of the market economy. Managing the concern of resource scarcity and unlimited wants comes out as an essential feature of a market economy. In this case, resource allocation would be adequately determined through effective price system and quality control mechanisms. In Hong Kong, resource allocation is solely determined by the market forces and the intervention of private sector. The market forces that comprise of aggregate demand and supply defines the nature of a market economy. As noted by Arrow (2008, 612), Hong Kong civil service majorly handles issues of industrial planning and the management of the local industry in a bid to determine the amount of resources that need to be allocated to specific regions of concern. This technique accords Hong Kong an opportunity to engage the highly adaptable workforce in dealing with cases of resource allocation and distribution in a free market economy2. Hong Kong has made tremendous steps in avoiding overregulation of resource allocation by guaranteeing an adequate financial infrastructure through the employment of qualified workforce. Resources are allocated in a classical market economy based on two economic principles. Flexible price mechanism plays an essential role in determining the quantity of goods and services demanded and the amount of goods and services that needs to be supplied to the market. The price of goods and services would be determined by aggregate demand and supply of goods in a market economy. In a classical market economy, flexible prices are unrestricted through market control or rather forces of demand and supply, and government regulations3. The state would establish mechanisms for identifying specific regions that require resource allocation based on the flexibility of price and consumers’ interest in purchasing particular goods and services. According to Allen (2010, 81), the market would quickly achieve an equilibrium in case of any shortage or supply of the produces goods and services. This initiative would enable the government to ensure a balance between quantity demanded and quantity supplied for reasons of ascertaining equity in the distribution and allocation of goods and services. Consequently, a classical market economy guarantees adequate employment as a mechanism for containing a surplus of produced goods and services. The purchasing power is directly proportional to income since most consumers would want to buy goods or services based on their financial capability. Resources are allocated in a classical market economy through saving-investment equality. In view of this standpoint, savings made by both private and household sector would be consistent with the investment expenditure initiated by consumers of goods and services. For instance, in Hong Kong, the allocation of resources in different parts of the city is determined by investment expenditure conceptualized by both the private firms and household sectors. Ideally, the Hong Kong government would majorly allocate resources to regions with high purchasing power but are not sufficiently endowed with resources. Saving-investment equality deals with capital goods in the sense that a decrease in the use of capital goods is consistent with the exact amount of investment demand. As observed by Baumol (2015, 78), the technique of allocating goods and services based on saving-investment equality is understood in accordance with Say’s Law that sensitizes on aggregate production and consumption of goods in a classical market economy4. On the same note, the humanity needs to be ensured with enough income to exhaust the surpluses to avoid experiencing situations of the unbalanced market economy. Fundamentally, employing the mechanism of saving-investment equality for the visualization of the theory behind classical market economy proves authentic for understanding the mismatch between aggregate demand and supply. Determining the extent in which Hong Kong economy should be perceived as a market economy needs to be understood in regards the role played by government in ensuring mature market economies. Statistically, Hong Kong is ranked as one of the best free markets in the context of global economy. For example, in view of the Canadian 2013 data, Hong Kong is ranked as the best country out of the 157 nations that ascertain to achieve economically free market. Hong Kong registered a score of 8.97 out of 10 making it one of the best nations that attempt to employ the classical market economy in their resource allocation initiatives5. Currently, Hong Kong upholds the rule of law and fine tradition in ensuring that goods and services are allocated equitably and at a minimal cost. In view of the research conducted by Condorelli (2013, 590), Hong Kong economy is at its informative age and its market economy is just like the economy of any other nations. In this context, the allocation and the provision of goods and services to the targeted clients should not only be defined by market forces but also the intervention of the government. The government of Hong Kong plays an essential role in helping the city in its transition towards realizing the benefits of a classical market economy. Based on the neoclassic assumption of the efficacy of market, government’s intervention proves quite resourceful in defining intellectual property rights and maintaining the value of a currency6. On the same note, the consideration of this mechanism has enabled Hong Kong to battle with issues of high inflation rates that is characterized by unfavorable aggregate demand and supply of capital goods. In view of the principles and mechanisms of allocating resources, it is apparent that Hong Kong uses both tactical and strategic principles in allocating goods and services. In this context, Hong Kong majorly employs four primary mechanisms of allocating its resources. The policy of strategic planning and diversification come out as an essential technique for determining the capacity of both the private and the public sector in producing resources that would meet the needs of their consumers. Strategic planning involves the formulation of companies’ core values and goals to effectively use scarce resources through an optimal allocation in a bid to containing unlimited wants. On the other hand, Hong Kong adopts diversification mechanism for reasons of selling businesses that fit strategically in the targeted regions to adequately evaluate consumers’ expectations7. Hong Kong considers budgeting as an idealistic principle of allocating goods and services with a sole intention of accomplishing the objective initiated at the strategic planning level. Currently, most industries in Hong Kong adopt the technique of project budgeting for reasons of encountering situations of an unfavorable market economy that is comprised of high inflation rates. Budgeting involves allocation of money for conducting marketing research. As noted by Lipsey and Chrystal (2011, 65), a comprehensive marketing research helps in disclosing consumers’ preferences, and this means a lot in assisting countries and cities like Hong Kong realize the essentiality of a classical market economy. Additionally, budgeting encompasses the allocation of both the public and the private sector funds to aid in the production of goods and services8. The distribution of funds in the context of a nation’s budgeting procedures could be translated through a systematic visualization of overhead costs such as hiring the workforce, commissioning market studies, and for boosting promotional activities like an advertisement. Logistical management and process re-engineering emerges as a crucial mechanism that Hong Kong uses in the allocation of its goods and services. Logistical management involves the supervision of the flow of resources in and out of a company. In this context, adequate logistical management ensures that goods and services are provided in agreement with consumers’ expectations and needs. As observed by Samuelson and Nordhaus (2009, 82), there would be no reason per se to provide excess goods and services while the aggregate demand is low. Process re-engineering encompasses the consideration of remedial action in the event of a change of process in the allocation of resources9. In this case, technology may be used to redesign jobs to ensure that adequate production is guaranteed. The outsourcing mechanism is adopted in Hong Kong as a supporting function of enabling the adequate production of goods and services. Outsourcing considers the use of outside vendors and value-added activities to ensure that resources are equitably allocated, and are consistent with the needs of targeted consumers. In conclusion, it is evident that a classical market economy establishes an idealistic platform for a healthy competition in which producers have the economic advantage of allocating resources without restrictions from the government. In light of the content of this paper, market forces and the private sector contributes significantly towards the adoption of a free market economy. Hong Kong market economy determines the potentiality to incur losses and make an enormous profit through a systematic analysis of price flexibility and market forces. Hence, Hong Kong classical market economy uses price flexibility and saving-investment equality in the allocation of resources. By and large, Hong Kong adopts both tactical and strategic planning as mechanisms for allocating goods and services. Bibliography Arrow, K. Economic welfare and the allocation of resources for invention. In The rate and direction of inventive activity: Economic and social factors (2008 pp. 609-626). Princeton University Press. Allen, F. 4 Stock markets and resource allocation. Capital markets and financial intermediation, 2010 pp. 81. Baumol, William, and Alan Blinder. Microeconomics: Principles and policy. Cengage Learning, 2015. Condorelli, D. Market and non-market mechanisms for the optimal allocation of scarce resources. Games and Economic Behavior 2013 pp. 582-591. Lipsey, R G and Chrystal, A. Economics, 12th edn, Oxford: Oxford University Press, 2011 Samuelson, P A and Nordhaus, W D. Economics, 19th edn, Boston: McGraw-Hill, 2009 Read More