Microeconomics Ch 2 The Market System and the Circular Flow

businesses

Economic entities (firms) that purchase resources and provide goods and services to the economy

a command economy is simnifically affected by missed production targets

False

command system

(also called socialism or communism) that relies on public ownership of resources and the use of central planning for most of the economic decision making

market system

(capitalism) category and are some mixture of the two extremes. they have private ownership or resources and use markets and prices to coordinate and direct economic activity, but at the same time government plays a large role in the economy that affects the allocation of resources

division of labor

(human specialization) The separation of the work required to produce a product into a number of different tasks that are performed by different workers; specialization of workers

households

Economic entities (of one or more persons occupying a housing unit) that provide resources to the economy and use the income received to purchase goods and services that satisfy economic wants

self-interest

That which each firm, property owner, worker, and consumer believes is best for itself and seeks to obtain

dollar votes

The "votes" that consumers cast for the production of preferred products when they purchase those products rather than the alternatives that were also available

the market system is a method of

communicating and coordinating economic decisions

the advent of personal computers and word processing software that eliminated the market for electric typewriters would be an example of

creative destruction

The demand for resources is

derived from the demand for the products made with the resources

market

is a place, institution, or process where buyers and sellers interact with each other. Markets and prices are used to communicate and coordinate the decisions of buyers and sellers

Economic System

is a set of institutions and a coordinating mechanism to respond to the economizing problem for an economy

competition

is based on the independent actions of buyers and sellers. they have the freedom to enter or leave markets . This competition spreads economic power and limits its potential abuse

in what way does human specialization contribute to an economy's output

it fosters learning by doing

in the market system, the role of government is best described as

limited

freedom of enterprise

the freedom of firms to obtain economic resources, to use those resources to produce products of the firm's own choosing, and to sell their products in markets of their choice

resource market

A market in which households sell and firms buy resources or the services or resources

product market

A market in which products are sold by firms and brought by households

circular flow diagram

An illustration showing the flow of resources from households to firms and of products from firms to households. These flows are accompanied by reverse flows of money from firms to households and from households to firms

sole proprietorship

An unincorporated firm owned and operated by one person

partnership

An unincorporated firm owned and operated by two or more persons

money

Any item that is generally acceptable to sellers in exchange for goods and services

medium of exchange

Any items sellers generally accept and buyers generally use to pay for a good or service; money; a convenient means of exchanging goods and services without engaging in barter

consumer sovereignty

The determination by consumers of the types and quantities of goods and services that will be produced with the scarce resources of the economy; consumers direction of production through their dollar votes

barter

The direct exchange of one good or service for another good or service

freedom of choice

The freedom of owners of property resources to employ or dispose of them as they see fit, of workers to enter any line of work for which they are qualified, and of consumers to spend their incomes in a manner that they think is appropriate

creative destruction

The hypothesis that the creation of new products and production methods destroys the market power of existing monopolies

corporation

The misuse of government power, with which one has been entrusted or assigned, to obtain private gain; includes payments from individuals or companies to secure advantages in obtaining government contracts avoiding government regulations, or obtaining inside knowledge about forthcoming policy changes.

"invisible hand"

The tendency of competition to cause individuals and firms to unintentionally but quite effectively promote the interests of society even when each individual or firm is only attempting to pursue its own interests

specialization

The use of the resources of an individual, a firm, a region, or a nation to concentrate production on one or a small number of goods and services

which would necessarily result, sooner or later, from a decrease in consumer demand for a product (a) a decrease in the profits of firms in the industry (b) an increase in the output of the industry (c) an increase in the supply of the product (d) an increase in the prices of resources employed by the firms in the industry

a

in the system of central planning, the outputs of some industries became the inputs for other industries, but a failure of one industry to meet its production target would cause

a chain reaction of production problems and bottlenecks

when workers specialize in various tasks to produce a commodity, the situation is referred to as

a division of labor

the private ownership of property resources and use of markets and prices to direct and coordinate economic activity are characteristics of

a market system

in the market system, if one firm introduces a new and better method of production that enhances the firm's economic profits, other firms will be forced to adopt the new method to

avoid economic losses or bankruptacy

in market economy the risk of producing goods and services is largely assumed by

business owners

in the market system, freedom of enterprise means that

businesses are free to produce products that consumers want

how do consumers typically express self-interest

by seeking the lowest price for a product

which is one of the main characteristics of the market system (a) central economic planning (b) limits on freedom of choice (c) the right to own private property (d) an expanded role for government in the economy

c

which is the primary factor determining the share of the total output of the economy received by the household? (a) the tastes if the household (b) the medium of exchange used by the household (c) the prices at which the household sells its resources (d) ethical consideration in the operation of a market economy

c

The maximization of profit tends to be the driving force in the economic decision making of

entrepreneurs

"Coincidence of wants" means that two persons want to acquire the same good or service

false

A command economy is characterized by the private ownership of resources and the use of markets and prices to coordinate and direct economic activity

false

In a market system, the government owns most of the property resources (land and capital)

false

The pursuit of economic self-interest is the same thing as selfishness

false

if the market price of resource A decreases, firms will tend to employ smaller quantities of resource A

false

one of the fundamental questions is who will control the output

false

if an increase in the demand for a product and a rise in its price cause an increase in the quantity supplied, price is successfully performing its

guiding function

which is a prerequisite of specialization

having a convenient means of changing goods

laissez-faire capitalism

or "pure capitalism," in which markets direct economic activity and there is a very limited role for government in the economy

to decide how to use its scarce resources to satisfy economic wants, a market economy primarily relies on

prices

private property

private individuals and organizations own and control their property resources by means of institution

The chief economic virtue of the competitive market system is that it

promotes the efficient use of resources

in the circular flow diagram, businesses

sell products and buy resources

which is a characteristic of competition as economists see it

the widespread diffusion of economic power

In the circular flow model businesses sell goods and services and buy resources, whereas households sell resources and buy goods and services

true

Money is a device for facilitating the exchange of goods and services

true

Property rights encourage investment, innovation, exchange, maintenance of property, and economic growth

true

When a market is competitive, the individual sellers of a product are unable to reduce the supply of the product and control its prices

true

a basic economic argument for the market is that it promotes an efficient use of resources

true

creative destruction is the hypothesis that the creation of new products and production methods simultaneously destroys the market power of existing monopolies and businesses

true

economic efficiency requires that a given output of a good or service be produced in the least costly way

true

increasing the amount of specialization in an economy generally leads to the more efficient use of its resources

true

industries in which Economic profits are earned by the firms in the industry will attract the entry of new firms

true

one way human specialization can be achieved is through a division of labor in productive activity

true

profit and loss in a market economy give business owners incentives to assess and manage risk

true

pure capitalism is also called laissez-faire capitalism

true

shells may serve as money if sellers are generally willing to accept them as money

true

the consumers are sovereign in a market economy and register their economic wants with "dollar votes"

true

the freedom of business firms to produce a particular consumer good is always limited by the desires of consumers for that good

true

the incentive the the market system provides to induce technological improvement is the opportunity for economic profits

true

the market system is an organizing mechanism and also a communication network

true

the tendency for individuals pursuing their own self-interests to bring about about results that are in the best interest of society as a whole is often called the "indivisible hand"

true