Microeconomics - Ch 2: The Market System and the Circular Flow

Ted and Fred are the owners of a gas station. They invested $150,000 each and pay an employee named Lawrence $35,000 per year. This year's revenues are $900,000, while costs are $940,000. Who is legally responsible for bearing the $40,000 loss? - Ted and Fred - Fred - Lawrence, Ted, and Fred - Ted - Lawrence

Ted and Fred

a. Suppose that businesses buy a total of $100 billion of the four resources (labor, land, capital, and entrepreneurial ability) from households. If households receive $60 billion in wages, $10 billion in rent, and $20 billion in interest, how much are households paid for providing entrepreneurial ability? b. If households spend $55 billion on goods and $45 billion on services, how much in revenues do businesses receive in the product market?

a. 10 billion b. 100 billion explanation: a. $10 billion for entrepreneurial ability: $100 billion in total factor payments − $60 billion in wages − $10 billion in rent − $20 billion in interest. b. $100 billion: $55 billion + $45 billion, because household expenditures equal business revenues.

With current technology, suppose a firm is producing 400 loaves of banana bread daily. Also assume that the least-cost combination of resources for producing those loaves is 10 units of labor, 7 units of land, 2 units of capital, and 3 units of entrepreneurial ability, selling at prices of $20, $60, $60, and $20, respectively. Assume the firm can sell these 400 loaves at $2 per unit. a. What is the firm's total revenue? b. What is its total cost? c. Calculate the amount of economic profit or loss.. d. Will it continue to produce banana bread? e. If this firm's situation is typical for the other makers of banana bread, will resources flow toward or away from this bakery good?

a. 800 b. 800 c. 0 d. yes e. no change explanation: To calculate total revenue, multiply the selling price by the number of units sold. Total revenue equals $2 (price) multiplied by 400 (loaves of bread sold). So, total revenue equals $800. To calculate total cost multiply each input usage (number of units employed) by the price of the input and then add these values together. Total cost equals 10 × $20 (cost of labor) + 7 × $60 (cost of land) + 2 × $60 (cost of capital) + 3 × $20 (cost of entrepreneurial ability) = $800. The profit/loss for this firm equals total revenue minus total cost. Here, profit/loss equals $800 (total revenue) minus $800 (total cost) = $0. If total revenue is greater than total cost, the firm will have a profit, but if total cost is greater than total revenue, the firm will have a loss. If the firm is earning positive, including zero, economic profit, it will continue to produce banana bread. However, if the firm is losing money (suffering a loss because total cost exceeds total revenue), it will stop producing banana bread. If the firm is earning positive economic profit, other firms or individuals will want to produce banana bread. Thus, resources will flow toward this bakery good. If the firm is suffering from an economic loss, then resources would flow away from this bakery good, as firms or individuals would exit the market to avoid the loss. If economic profit equals zero, there will be no change, as no new firms will enter the market and no firms will exit.

True or False: Households sell finished products to businesses.

false

True or False: Money must be issued by a government for people to accept it

false

In market economies, firms rarely worry about the availability of inputs to produce their products, whereas in command economies input availability is a constant concern. This is because - in command economies, no market-pricing mechanism exists to incentivize resource suppliers to increase resource availability when a shortage occurs. - in market economies, buyers of inputs can choose what price they are willing to pay for the inputs. - in command economies, input availability is determined by central planners who may not correctly respond to consumer demand. - in market economies, buyers of inputs know that consumers want to purchase the product.

in command economies, no market-pricing mechanism exists to incentivize resource suppliers to increase resource availability when a shortage occurs

The meaning of the phrase "invisible hand" is that - since buyers and sellers do not usually transact in person, the transactions are invisible. - no one person or firm actually sets the price of the product. - market prices are not always known to buyers and sellers. - market prices coordinate the economy by rationing resources and output and by providing incentives to produce the goods and services most desired by society.

market prices coordinate the economy by rationing resources and output and by providing incentives to produce the goods and services most desired by society.

1. Self-interest helps achieve society's economic goals because: - consumers know which goods can be produced at the lowest cost. - producers know which goods consumers want the most. - consumers and producers both operate based on society's economic goals. - consumers and producers exercise their freedom to act in their own self-interest 2. There is such a wide variety of desired goods and services in a market system because: - individual wants are diverse. - there is always a need to produce something new and improved. - consumers change their minds frequently. - producers determine what to produce. 3. What is produced is ultimately determined by: - consumers, because they participate in marketing surveys - consumers, because if the goods offered are not what consumers want, consumers will not buy them. Correct - producers, because they determine what to produce - producers, because they are driven by profits

1. consumers and producers exercise their freedom to act in their own self-interest 2. individual wants are diverse. 3. consumers, because if the goods offered are not what consumers want, consumers will not buy them.

1. Barter requires that you - find a person who has what you want and a person who needs what you have - live in an area where there are people with diverse talents and a market with diverse products - are a member of an established barter network. - know market value of all the goods and services that you want and have to offer. 2. The use of money - provides a common value that makes buying and selling transactions simpler as long as there is a single currency in use. - provides a common value that makes it easier to barter. - establishes the value of goods and services. - provides a common value that makes buying and selling transactions simpler than barter. 3. Consider the statement: "We want money only to part with it." When people express a desire to have money, they really want - a better paying job - a larger balance in their checking accounts - to be rich - the goods/services that money can buy

1. find a person who has what you want and a person who needs what you have to offer. 2. provides a common value that makes buying and selling transactions simpler than would be the case with barter. 3. the goods and services that money can buy.

1. An advantage of using capital in the production process is that it - improves efficiency, reduces output, and provides growth - replaces labor - improves efficiency, increases output, and provides growth - is more expensive than labor 2. The term "division of labor" means that workers - share the labor needed to complete a job - identify the products than can be produced so that they can take advantage of their individual abilities and skills - develop skills needed to complete a job - specialize in tasks that take advantage their individual abilities and skills 3. When an economy relies on specialization - trade is established according to the value of the specialized product. - centralized coordination ensure that everyone obtains goods they need. - trade enables individuals to obtain goods they don't specialize. - more efficiency in production, but there will be disruptions in the distribution of goods

1. improves efficiency, increases output, and provides growth. 2. specialize in tasks that take advantage of their individual abilities and skills. 3. trade enables individuals to obtain the goods in which they do not have a specialization

1. Price ceilings during a hyperinflation are problematic because - consumers don't like the goods that producers are offering for sale. - the excess money supply makes prices too high. - many government officials will become corrupt. - many producers will go out of business because the costs of production will soon exceed the legal selling price. 2. A Venezuelan-style economic collapse would be less likely in a mixed economy like the United States because - corruption is likely when economic power is more diffused - mixed economies like the US usually have a more equal distribution of income - private industry has strong financial incentives to produce efficiently - inflation is always low in a mixed economy

1. many producers will go out of business because the costs of production will soon exceed the legal selling price. 2. corruption is likely when economic power is more diffused + private industry has strong financial incentives to produce efficiently

1. In a market system, scarce goods are allocated by: - market prices that are determined by consumers and producers acting in their own self-interest. - fixed prices that are determined by consumers and producers acting in the public interest. - estimated prices that are determined by consumers and producers acting in their own self-interest. - market prices that are determined by consumers and producers acting in the public interest. 2. In a command economy, scarce goods are allocated by: - a government-appointed planning board based on the board's long-term priorities. - an elected planning board based on the board's preferences. - a government-appointed planning board based on the board's preferences. - an elected planning board based on the board's long-term priorities.

1. market prices that are determined by consumers and producers acting in their own self-interest. 2. a government-appointed planning board based on the board's long-term priorities.

1. In the circular flow model, - resource markets provide goods and services and product markets provide exchange of labor. - labor markets provide transfer of money and goods markets provide transfer of inputs. - resource markets provide exchange of labor and product markets provide exchange of goods and services. - goods markets provide transfer of money and labor markets provide transfer of inputs. 2. In the circular flow model, - businesses sell goods/labor; households buy goods/labor - businesses buy both goods/labor; households sell both goods/labor - businesses buy goods/sell labor; households sell goods/buy labor - businesses sell goods/buy labor; households buy goods/sell labor 3. In the goods/services portion of the circular flow model, there is a flow of - labor and flow of money - real goods/services and flow of labor - real goods/services and flow of money - real goods/services and flow of output

1. resource markets provide for the exchange of labor and product markets provide for the exchange of goods and services. 2. businesses sell goods and buy labor; households buy goods and sell labor. 3. real goods and services and a flow of money.

1. Consider the following statement: "The market system is a profit-and-loss system." This statement is - true, because consumers purchase only what they want, producers will earn profits - true, because producer decisions are motivated to earn profits - false, because consumers purchase only what they want, producers earn profits - false, because the market system does more than provide profits/losses 2. Consider the following statement: "Competition is the disciplinarian of the market economy." This statement is - true, b/c when consumers realize there is competition, they are driven to demand more goods/services - true, b/c when producers face competition, they provide goods/services at the lowest cost - false, b/c when producers face competition, driven to provide more goods/services, and costs rise - false, b/c when consumers realize there is competition, they are driven to demand more goods/services

1. true, because producer decisions are motivated by the attempt to earn profits 2. true, because when producers face competition, they are driven to provide goods and services at the lowest possible cost.

Assume that a business firm finds that its profit is greatest when it produces $40 of product A. Suppose each of the three techniques shown in the table produce the desired output. a. With the resource prices shown, which technique will the firm choose? b. Assume new technique, technique 4, is developed. It combines 2 units of labor, 2 of land, 6 of capital, and 3 of entrepreneurial ability. With the resources priced in table, will the firm adopt the new technique? c. Suppose an increase in labor supply causes price of labor to fall to $1.50 per unit, all other resource prices remain. Which technique will the producer choose? d. Evaluate: "The market system causes the economy to conserve most in the use of resources that are particularly scarce in supply. Resources that are scarcest relative to the demand for them have the highest prices. As a result, producers use these resources as sparingly as is possible."

a. Technique 2; This technique represents the least-cost combination; profit; $6; expand; It will end when enough firms enter the market to reduce economic profits to zero b. yes c. technique 1 d. yes

Decide whether each of the following descriptions most closely corresponds to being part of a command system, a market system, or a laissez-faire system. a. A woman who wants to start a flower shop finds she cannot do so unless the central government has already decided to allow a flower shop in her area. b. Shops stock and sell the goods their customers want, but the government levies a sales tax on each transaction in order to fund elementary schools, public libraries, and welfare programs for the poor. c. The only taxes levied by the government are to pay for national defense, law enforcement, and a legal system designed to enforce contracts between private citizens.

a. command system b. market system c. laissez-faire system

a. "If you compare a list of today's most powerful and profitable companies with a similar list from 30 years ago, you will see lots of new entries." b. "Managers in the old Soviet Union often sacrificed product quality and variety because they were being awarded bonuses for quantitative, not qualitative, targets." c. "Each day, central planners in the old Soviet Union were tasked with setting 27 million prices—correctly." d. "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest." Invisible hand

a. creative destruction b. invisible hand c. invisible hand d. invisible hand

a. An institution that brings buyers and sellers together b. The right of private persons and firms to obtain, control, employ, dispose of, and bequeath land, capital, and other property c. The presence in a market of independent buyers and sellers who compete with one another and who are free to enter and exit the market as they each see fit d. The freedom of firms to obtain economic resources, decide what products to produce with those resources, and sell those products in markets of their choice e. What each individual or firm believes is best for itself and seeks to obtain f. Economic transactions willingly undertaken by both the buyer and the seller because each feels that the transaction will make him or her better off g. The freedom of resource owners to dispose of their resources as they think best; of workers to enter any line of work they are qualified; and consumers spend their incomes in whatever way

a. market b. private property c. competition d. freedom of enterprise e. self-interest f. mutually agreeable g. freedom of choice

Suppose Natasha currently makes $80,000 per year working as a manager at a cable TV company. She then develops two possible entrepreneurial business opportunities. In one, she will quit her job to start an organic soap company. In the other, she will try to develop an Internet-based competitor to the local cable company. For the soap-making opportunity, she anticipates annual revenue of $465,000. She estimates the costs for the necessary land, labor, and capital to be $395,000 per year. For the Internet opportunity, she anticipates costs for land, labor, and capital of $3,250,000 per year and revenues of $3,275,000 per year. a. Should she quit her current job to become an entrepreneur? b. If she does quit her current job, which opportunity would she pursue?

a. no b. neither

The table below contains information on three techniques for producing $15 worth of bar soap. Assume that we specified ″$15 worth of bar soap″ because soap costs $3 per bar and all three techniques produce 5 bars of soap ($15 = $3 per bar × 5 bars). So you know each technique produces 5 bars of soap. a. What technique will you want to use if the price of a bar of soap falls to $2.75? b. How many bars of soap will you want to produce if the price of a bar of soap falls to $2.00? c. Suppose that the price of soap is again $3 per bar but that the prices of all four resources are now $1 per unit. Which is now the least-profitable technique? d. If the resource prices return to their original levels (those shown in the table) but a new technique is invented that can produce 3 bars of soap (yes, 3 bars, not 5 bars!), using 1 unit of each of the four resources, will firms prefer the new technique?

a. technique 2; technique 2; technique 2 b. zero: it is not profitable to produce bars of soap at this selling price c. technique 3 d. no, they will still prefer technique 2

Aaliyah, Madison, Mia, and Maya have decided to pool their financial resources and business skills to open and run a new coffee shop. They will share any profits or losses that the business generates and will be personally responsible for making good on any debt that their business undertakes.

business is a partnership

The market system depends on private property and the protection of property rights to: - provide an incentive to maintain the property and allow for the orderly transfer of property ownership. - establish the cost for the administration and orderly transfer of property. - ensure that those people who own property use it wisely. - make sure that there are adequate safeguards against theft.

provide an incentive to maintain the property and allow for the orderly transfer of property ownership.

The emergence of self-driving cars is an example of "creative destruction" because - self-driving cars will likely replace most cars that require drivers. - the firms that produce cars today will likely be the main producers of self-driving cars. - self-driving cars will be less expensive to build than current cars. - it shows that the automobile industry is becoming more efficient.

self-driving cars will likely replace most cars that require drivers.

Some large hardware stores, such as Home Depot, boast of carrying as many as 20,000 different products in each store. This volume of goods is the result of - the purchasing agents at Home Depot who have determined what goods consumers want. - the purchasing agents at Home Depot who have determined what goods producers have available. - the choice of consumers regarding what to purchase to satisfy their wants and the choice of producers regarding what to produce to satisfy their wants. - the choice of consumers regarding what to purchase to satisfy their wants and the choice of producers regarding what to produce to maximize profits

the choice of consumers regarding what to purchase to satisfy their wants and the choice of producers regarding what to produce to maximize profits.