Allocation and Production

Allocation refers to the decisions that determine which inputs will be used to produce which outputs. Allocation thus precedes production in time.

Prior to the start of any production activity, economic decision-makers must specify the ends to which workers, natural resources, buildings, land, machines, and so forth will be employed.

The following figure summarizes the economic process, highlighting the initial stage: allocation and production.

The economic process
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An economy comprises four major economic activities: distribution and consumption, and allocation and production.

One of the most significant differences among economies is which economic actors make these decisions, and what criteria they use in making them.

ENL’s criterion for economic success is sustainable well-being, and allocation must therefore serve this end. Ignoring wants for now, this means that those making allocation choices must be aware of the prospective health consequences of their decisions. They must therefore consider effectual value, which implies that their vision must extend beyond production to distribution and consumption.

Although the above diagram focuses on the role of allocation in linking inputs with outputs, it must be remembered that doing so rationally implies a deep understanding of the entire economic process. Allocation is not only the most crucial economic activity because of its broad consequences, it also makes the heaviest demands on our information sources, our intellects, and our ethical sensibilities.

The scope of production, by contrast, is much narrower. Since allocation decisions have already been made, those engaged in production know which outputs should be produced, and at what quantities. The challenge faced at this stage is simply to produce these outputs at the highest possible quality and with the least damage to workers, the population as a whole, and the environment.

The concepts described in this section are intended to help a society successfully meet these allocation and production challenges.

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