Chapter 2 Homework - Microeconomics

A Venezuelan-style economic collapse would be less likely in a mixed economy like the United States because

-Private industry has strong financial investors to produce efficiently -Corruption is less likely when economic power is more diffused

How does the market system answer the following fundamental question: What goods and services will be produced?

Those goods and services that can be produced at a continuing profit.

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. ANS: Command System B. Shops stock and sells 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. ANS: Market System 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. ANS: Laissez-faire system

Identify each of the following quotes as being associated with either the concept of the invisible hand or the concept creative destruction.

A. If you compare a list of today's most powerful and profitable companies with similar list from 30 years ago, you will see lots of new entries: ANS: Creative Destruction B. Managers in the old soviet union often sacrificed product quality and variety because they were being awarded bonuses for quantitate, not qualitative, targets ANS: Creative Destruction C. Each day, central planners in the old Soviet Union were tasked with setting 27 million prices-correctly. ANS: Invisible Hand 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: ANS: Invisible Hand

The presence in a market of independent buyers and sellers who compete with one another and who are free to enter and exit the markets as they each see fit

Competition

The freedom of resource owners to dispose of their resources as they think best; of workers to enter any line of work for which they are qualified; and of consumers to spend their incomes in whatever way they feel is most appropriate

Freedom of choice

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

Freedom of enterprise

Scarce means

It means that the demand for a good or service is greater than the availability of the good or service. Therefore, scarcity can limit the choices available to the consumers who ultimately make up the economy.

An institution that brings buyers and sellers together

Market

Economic transactions willingly undertaken by both the buyer and the seller because each feels that the transaction will make him or her better off

Mutually agreeable

The right of private persons and firms to obtain, control, employ, dispose of, and bequeath land, capital, and other property

Private Property

What each individual or firm believes is the best for itself and seeks to obtain

Self-interest

In a command economy, scarce goods are allocated by

a government's-appointed planning board based on the board's long-term priorities

In the circular flow model,

businesses sell goods and buy labor; households buy goods and sell labor.

Self-interest helps achieve society's economic goals because

consumers and producers exercise their freedom to act in their own self-interest

What is produced is ultimately determined by

consumers because if the goods offered are not what consumers want, consumers will not buy them

Barter requires that you

find a person who has what you want and a person who needs what you have to offer.

Shielding employees and suppliers from business risk ________ economic outcomes The ________of the business are the ones that assume most of the business risk.

improves owners

An advantage of using capital in the production process is that it

improves efficiency, increases output, and provides growth -- Capital is the machinery, tools and buildings humans use to produce goods and services

In market economics, firms rarely worry about the availability of inputs to produce their products, whereas in command economies input is a constant concern. This is because

in command economies, input availability is determined by central planners who may not correctly respond to customer demand.

There is such a wide variety of desired goods and services in a market system because

individual wants are diverse

Price ceilings during a hyperinflation are problematic because

many producers will go out of business because the cost of production will soon exceed the legal selling price.

The meaning of the phrase "Invisible hand is that"

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

In a market system, scarce goods are allocated by

market prices that are determined by consumers and producers acting in their own self-interest.

Which of the following is characteristic of a laissez-faire system

minimal government intervention

The market system depends on private property and the protection of property rights to

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

The use of money

provides a common value that makes buying and selling transactions simpler than would be the case with barter.

Is the goods and services portion of the circular flow model, there is a flow of

real goods and services and a flow of money.

In the circular flow model

resource markets provide for the exchange of labor and product markets provide for the exchange of goods and services.

The term "division of labor" means that workers

specialize in tasks that take advantage of their individual abilities and skills

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

The emergence of self-driving cars is an example of creative destruction because

the firms that produce cars today will likely be the main producers of self-driving cars

Consider the statement: "We want money only to part with it." When people express a desire to 'have money,' they really want

the goods and services that money can buy.

When an economy relies on specialization,

trade enables individuals to obtain the goods in which they do not have a specialization

Consider the following statement: "The market system is a profit-and-loss-system." This statement is:

true, because producer decisions are motivated by the attempt to earn profits.

Consider the following statement: "Competition is the disciplinarian of the market economy." This statement is:

true, because when producers face competition, they are driven to provide goods and services at the lowest possible cost.