Econ 202 Chapter 2 UL Cary Heath

What is produced is ultimately determined by

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

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

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 revenues are $900,000, while costs are $940,000. Who is legally responsible for bearing the $40,000 loss?

Ted and Fred

in the circular flow model

- in market economies, buyers of inputs know that sellers want to earn profits - businesses sell goods and buy labor; households buy goods and sell labor

In the circular flow model there is a flow of

real goods and services and a flow of money

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 a command economy scarce goods are allocated by

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

With current technology, suppose a firm is producing 800 loaves of banana bread daily. Also assume that the least-cost combination of resources in producing those loaves is 6 units of labor, 5 units of land, 4 units of capital, and 1 unit of entrepreneurial ability, selling at prices of $40, $60, $60, and $20, respectively. Assume the firm can sell these 800 loaves at $1 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

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 customers want but the government levies a sales tax on each transaction to fund elementary schools, public libraries, and welfare programs: 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 b. Market c. Laissez-faire

Match each of the quotes with the correct term. 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:"

a. Creative destruction b. Incentive problem c. Coordination problem d. Invisible hand

Match each term with the correct definition. 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 for which they are qualified; and of consumers to spend their incomes in whatever way they feel is most appropriate:

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 and costs for the necessary land, labor, and capital of $395,000 per year. For the Internet opportunity, she anticipates costs for land, labor, and capital of $3,250,000 per year as compared to 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 market system depends on private property ownership and the protection of private property rights to

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

Self-interest helps achieve society's economic goals because

as consumers and producers exercise their freedom to act in their own self-interest markets will produce the desired goods at the lowest possible cost

Franklin, John, Henry, and Harry have decided to pool their financial resources and business skills in order to open up and run a 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. Their business should be classified as a:

partnership

Barter requires that you

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

The use of capital in the production process

improves efficiency, increases output, and provides for growth

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 because

in market economies, buyers of inputs know that sellers want to earn profits

The use of money

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

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

individual wants are diverse

The emergence of the MP3 (iPod) technology is an example of "creative destruction" because

it has replaced compact discs as a technology used for the storage and transfer of music

The phrase "invisible hand" means that

market prices provide information to consumers regarding products they wish to purchase, and to producers regarding products they wish to produce

In a market system scarce goods are allocated through the operation of

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

Millions of economic resources tend to get arranged logically and productively rather than haphazardly and unproductively because

private property owners are motivated to protect and maximize the benefits from their property

"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

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