What Is Allocation in Economics?

Allocation in economics is an analysis of how limited resources, also called factors of production, are distributed among producers, and how scarce goods and services are divided among consumers. Accounting cost, opportunity cost, economic cost and other costs are considered in this analysis.

The term “factors of production” refers to all inputs used in the production of goods or services. These factors are categorized into land, labor, capital and entrepreneurship. Land refers to all natural resources, such as gold or timber; labor includes the work of all workers at every level, except for entrepreneurs; capital includes money but also refers to the factory, equipment and any tools used to increase production; and entrepreneurship is any attempt to make an economic profit by taking an idea and combining all other factors. The analysis of how these production factors are allocated is used to maximize efficiency and utility.

Utility is an abstract measure of the satisfaction a consumer gains by consuming a particular product or through receiving a service. The units used to measure utility are arbitrary and are only useful for comparing the utility of one product to another. Total utility refers to the total satisfaction a consumer receives from all goods and services consumed. Marginal utility refers to the utility added by consuming one additional unit of a particular good or service.