Resource Allocation - the Curious Case of Tesco, the Local Pub and an Invisible Hand

By Hirst, Keith | Teaching Business & Economics, Summer 2011 | Go to article overview

Resource Allocation - the Curious Case of Tesco, the Local Pub and an Invisible Hand


Hirst, Keith, Teaching Business & Economics


The allocation of resources can be a tricky concept for AS Economics students to grasp. This may be due to the specific terminology, which is generally outside of the typical 16 year old's everyday usage. How often do we venture into the sixth form common room and overhear conversations about 'resource allocation' or 'factors of production'?

Specifications require students to understand the role of the price mechanism and how markets allocate resources (Table 1 shows some examples). Far from being a dull, dry topic, I feel this is one of the most interesting and provocative areas, and one which can be used to most readily engage students through their own experiences. In essence, this topic can be used to illustrate and underpin the primacy of Economics as a discipline and as a means to explain everyday activity.

In John Kay's wonderful book. The Truth About Markets, he deals with notions of resource allocation in a section called 'spontaneous order'. In this powerful section, which I often refer to with my students, Kay describes a microcosm of how markets work. His framework is that most ubiquitous feature of people's lives today - the visit to the supermarket. As a lead into the discussion a useful task is to consider the following questions with students. Possible anticipated responses are indicated.

When you visit a supermarket and you have your shopping, what do you do next?

Take it easy. I'll be out of here soon enough. Try to get served/get out of the place as quickly as possible.

What is your goal?

Self-interest: try to get served/get out of the place as quickly as possible.

What is your individual strategy when you go into a supermarket?

Look for the shortest queue. Look for the queue which contains people with least items in their baskets. Head for the '10 items or less' checkout or self-service.

What other alternatives might exist?

A system where a supermarket employee directs people to specific queues (a 'command economy' approach).

Kay considers how, when undertaking a visit to the supermarket, we have certain objectives. One important objective is to be served and be out of the place as soon as possible. The achievement of this goal is the desired outcome. But this is not as straightforward as it might seem and Kay expresses what we perhaps already know, namely, that there are different strategies we can adopt to achieve this goal. His point is that, by individuals (spontaneously) acting in their own self-interest, the result is lower waiting times than would prevail under any other system that might be imposed by a central authority. This is the notion of the 'invisible hand'.

From the supermarket to the high street

Students, when out with friends, might buy lunch from a local deli, a fish and chip takeaway or an established chain and probably not give a second thought to why that business is supplying their needs. Come to think of it, how does the UK manage to feed 60 million people three times every day? There isn't a government department or official charged with this elemental task. It just seems to happen. But why does it just happen? The answer clearly lies in the spontaneous nature of markets, with business owners operating in their own self-interest to meet consumer wants.

Examples of the allocation and reallocation of resources are all around us. Whilst sixth form students may not be parlaying about spontaneous order and resource misallocation, they will know, from their own experience, examples of:

* people who have lost jobs and have found new, different employment;

* land that was once used for a specific purpose (factory, warehouse, railway line) but has now been redeveloped;

* retail premises that once sold electrical goods and are now coffee shops.

Resources are being allocated and reallocated all of the time and the reason behind this lies in the motives and self-interest of individuals and businesses. …

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