The allocation of resources is an economic theory concerned with the discovery of how nations, companies or individuals distribute economic resources or inputs in the economic marketplace. Traditional business inputs are land, labor and capital. Entrepreneurship or enterprise may also be included in this group since entrepreneurs or enterprises are usually responsible for the allocation of resources. The economic concept of private resource allocation is an important area of study in the free market system and the economic theory known as "the invisible hand."
Many economists believe that "the invisible hand" theory is the driving force for allocating resources in the free market economic system. Under this theory, the allocation of resources is created through the self interest, competition and supply and demand of individuals and companies in the economic marketplace. Individuals and companies distribute resources through self regulation by using only the inputs they need and selling or giving away their leftover economic resources or inputs. Through this distribution of resources, the economic market place grows and expands as more individuals and companies have access to resources.
Each economic resource or input has an important place in the economic marketplace. Historically, land includes natural resources, such as timber, wildlife, soil and rock. In modern terms, this economic resource includes buildings, equipment or other major assets owned by individuals and companies needed to produce consumer goods or services. Labor is the manpower companies use to transform raw economic resources into finished goods or services. Capital usually represents the money acquired or made from the sale of consumer goods and services produced by the other two economic resources. Economics is concerned with how these resources are allocated to determine the best use for a nation’s natural economic resources and the labor of its citizens.
An allocation of resources analysis also looks at the costs involved with acquiring economic resources or inputs and how efficiently these resources are transformed into valuable goods or services. This analysis may also attempt to determine the competitive advantage nations or companies have when using their economic resources or inputs to create goods or services. Rather than using inefficient production processes or methods to develop goods, nations or companies may be better off selling their economic resources to other nations or companies and earn higher amounts of capital resources. Using the competitive advantage method for the allocation of resources can be a beneficial way to improve the quality of life of individuals living in the nation or working for private companies.