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Several thousand people want to see the Lou's Crew puppet show at Oakdale High, but the auditorium only has one thousand seats. Since the seats are scarce, they have to be allocated, or rationed among the people who wanted them. Oakdale High's Student Council want to allocate the tickets so that they’ll go to the 1,000 people who will enjoy the show the most. What's the best way to do this? To find out, let's explore some different ways of allocating tickets.
· First come, first served
At a price of $2, more than 4,000 people would want to see the Lou’s Crew show. If there are only 1,000 tickets, they will go to the people who get to the ticket window before the tickets are sold out. This method of allocation, called first come, first served, is often used to distribute cheap tickets to rock concerts, sporting events, movies, and many other events.
· Lottery
Another way to allocate the tickets would be to have a lottery. Perhaps the people interested in seeing the show could put their names into a giant box and the first 1,000 names drawn would get the tickets. Lotteries have been used to allocate tickets to rock concerts and Olympic events.
Unfortunately, a lottery won't get the tickets to the people who want them most. A die-hard Lou’s Crew fan has the same chance of getting a ticket as someone who’s just looking for a cheap way to spend two hours.
· Personal Attributes
Another solution would be to allow only Oakdale High students to attend. That would have been an example of allocation according to personal attributes, like age, beauty, intelligence, class, race, and sex. The personal attributes method is used to allocate tickets to events like senior proms and Academy Awards presentations.
As with a lottery, this method won't allocate tickets to those who want the tickets most, since some Lou’s Crew fans might not be Oakdale High students.
· Competitions
The tickets also could be allocated by having a competition for them. Maybe anyone interested in attending the show could write an essay explaining why, and the authors of the 1,000 best essays could receive tickets. Or maybe they could have a foot race, and the first 1,000 people over the finish line could receive tickets.
This method is commonly used to allocate goods like Easter eggs, scholarships, and trophies, but it’s rarely used to allocate tickets. It's simply too time-consuming to read essays or organize a contest every time tickets need to be allocated. There's also no guarantee that the tickets will go to the people who want them most. The tickets may end up going to the fastest runners or the best writers.
· Price
Another way to allocate the tickets is by charging a price high enough so that only 1,000 people would choose to buy tickets, say $10.
Economists like using price as a method of allocation because it's likely that the people who are willing to pay $10 to see the show are going to be very interested in seeing it. Of course, some rich people might slip in who are only mildly interested in the show. And some poor people who are passionate Lou's Crew fans might not be able to come up with the money. But allocating by price does a good job of getting the tickets to the people who are most interested in seeing Lou's Crew.
A big advantage of price allocation over other methods is that it's not as wasteful. Instead of standing in line, ticket buyers can use their time to mow lawns or baby-sit kids in order to earn money to buy the ticket. While standing in line benefits no one, mowing lawns and babysitting is useful and productive.
The functions of prices
Prices serve two major functions in our economy. The first function is to ration or allocate goods and services (like tickets) among the members of our society. The second function is to provide appropriate incentives.
· Allocation
As we've seen, allocating by price is a good way of getting tickets to the people who value them the most. Indeed, prices have so many advantages over other methods of allocation that we rely on them to ration most of the goods and services in our economy.
The next time you stroll through a shopping mall or supermarket, think about how we use prices to allocate the birthday cards, shoelaces, peaches, and other goods you find there. By making people pay for these goods, we’re able to get them to people who value them highly. The consumers who end up with those beach balls are generally the ones who want them the most.
· Incentives
Every year, our economy produces millions of different kinds of goods, like Valentine's Day cards, CDs, and tarragon vinegar. Every year these goods are somehow distributed to cities and towns throughout the United States.
The surprising thing is that nobody coordinates this process. We have no Secretary of the Economy or Minister of Central Planning to tell firms what to produce and where to sell it. Instead, prices guide firms so that they produce what we want and send it where we want it. If people want more watermelons, then they will pay a higher price for them. That higher price tells producers to grow more. If more motorcycles are needed in Nome, then their price there will go up. This sends a signal to profit-hungry producers to ship more motorcycles there.
Markets
Prices work their magic in markets, which are arrangements by which buyers and sellers exchange goods and services. The word "market" might make you think of supermarkets, flea markets, and farmers' markets, but restaurants, Jazzercise classes, and even Coke machines are also kinds of markets. Indeed, a market need not even have a physical location to exist. If you were to sell recipes by mail, you would be creating a market in which you would never even meet your customers.
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In addition to the answers I would like to briefly list the main differences:
1. Type of the items (tangible and non tangible)
2. Carrier or Shipment
3. Marketing & advertising
4. Customers' needs
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There are a few issues service companies must consider with distribution. They must consider the location, scheduling, convenience, number of outlets and direct versus indirect distribution. Location is very important to service companies, such as hotels and banks. They spend enormous amounts of time researching the best location to offer their services to the largest amount of their target market.
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DISTRIBUTION OF GOODS AND SERVICES. It is not unreasonable to wonder why all products are not sold directly from producer to final consumer. The simple answer is that distributors lower the costs of market transactions in a specialized economy. First, distributors lower the costs of market transactions by taking advantage of economies of scale and scope. For example, retail stores typically offer many varieties of goods. It would be very costly for consumers to purchase every item directly from producers. Second, distributors reduce the information costs of market transactions. Wholesale merchants traditionally, and retail merchants more recently, lower the costs of trade by lowering the costs of discovering supply and demand conditions. Third, distributors also lower the cost of trade by solving the asymmetric information problem. This problem typically arises when consumers cannot easily discern the quality of a product sold in the market place. Historically, the wholesale merchants solved this problem by organizing exchanges that inspected quality and standardized grades. The traditional local retail merchants often solved this problem by developing a reputation for honesty. Over time, as market transactions became increasingly anonymous, multiunit chain retail stores and multiunit manufacturing firms used advertising and branding as a solution to the asymmetric information problem.
Changing Patterns of DistributionThe nature of production and of the distribution of goods and services has changed greatly over the course of American history. As the basis of the U.S. economy shifted from agriculture to manufacturing, and then, more recently, to service industries, distribution's role in the economy changed along with the nature of the goods produced and sold in the market.
The market economy of colonial America in the seventeenth and eighteenth centuries was dominated by agriculture, fisheries, and the other extractive industries. For those goods produced for the market, the general merchant was the key distributor. The merchant bought goods of all types and was the ship owner, exporter, importer, banker, insurer, wholesaler, and retailer. The merchant's role, however, was often limited to the distribution of goods and services intended for the very wealthy. Most households manufactured their own clothing, farm implements, candles, and so on, and performed many household services themselves.
In the early nineteenth century, revolutions in transportation and communications increased the size of domestic markets, which led in turn to significant organizational changes in the production and distribution of goods and services. Although households continued to produce many of their own services such as cooking, laundering, and cleaning, the production and distribution of goods that were part of the market economy became more extensive and specialized. As the United States became an industrial nation, manufacturing firms that specialized in a single product line began to proliferate. In response, the general merchant gave way to distributors who specialized in one or two product lines, such as cotton, provisions, wheat, dry goods, hardware, or drugs. As new products were introduced, wholesale merchants specializing in these products also emerged.
The first census of distribution, taken in 1929, provides a picture of the flow of goods (especially manufactured goods) from producer to consumer. Manufacturers ultimately sell their goods to two distinct markets: industry and the home consumer. The census data shows that manufacturers sold 31 percent of their goods directly to final industrial consumers and 2.5 percent to final home consumers. The rest was sold to distributors such as wholesalers, manufacturers' own sales branches, and retailers. These distributors then resold their products to final industrial consumers or to retailers. The retailers in turn resold their products to final home consumers. In total, 169,702 wholesale establishments distributed $69 billion worth of goods. Manufacturing goods constituted 81 percent, farm products 13 percent, and the remainder, from other extractive industries, 6 percent. These goods were distributed by different types of wholesalers. Merchant wholesalers, agents, and brokers distributed 79 percent of the goods, whereas manufacturer's sales branches accounted for 21 percent. Some 1,476,365 retail establishments distributed $48.3 million worth of goods to final consumers.
The emergence of a national domestic market in the twentieth century transformed the organization of production and distribution once again. In the early twentieth century, mass retail distributors and chains replaced many local store merchants. These multiunit retail firms often purchased their products directly from manufacturers. Moreover, as the twentieth century progressed, wholesale merchants were squeezed from the other direction. Many large multiunit manufacturing firms began to market their products directly to consumers and retailers. Yet, despite these trends, the traditional wholesale merchants continued to play a significant role in the American economy.
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