12.3+Relative+Prices+and+Resource+Allocation

=  The impact of changes in relative prices on relative prices  =

Resource allocation is the study of how resources such as land, labour and capital are used to produce goods and services to meet the needs of households, businesses, governments and other economic agents. Economists are interested in ‘What’ goods are produced. Therefore they want to know where the resources are being directed in terms of production. Is the country using its labour resources to produce mineral exports or to manufacture shoes? Economists may also be interested in ‘How’ resources are being used in the production process. Generally speaking, firms with a profit incentive will try to minimise their costs of production. This may mean that they seek the most efficient way to convert their land, labour and capital into the end product. Finally, economists will look at how the products that are made are ultimately distributed in the economy - in other words, ‘Who’ gets to enjoy the goods and services that are produced. In a capitalist economy, markets will typically allocate resources to those who are willing and able to pay.

Consider the following case study of how the mining boom is affecting other industries (and the structure of relative prices) in Perth.

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