Economics Chapter 2 Test
The problems with a pure command economy are
1. consumers get low priority 2. little freedom of choice 3. central planning can be inefficient 4. resources owned by the central authority are sometimes wasted 5. environmental damage 6. no role for entrepreneurs
_______ enjoys the most control in a pure command economy a. the government b. the wealthy c. independently owned businesses d. no one entity
a. the government
law of increasing opportunity cost
reflected by shape of PPF, if the economy uses all resources efficiently, then each additional increment of one good requires the economy to give up successively larger increments of another good
Gains of specialization
saving time
traditional economies
shaped largely by custom and tradition
Production Possibilities Frontier (PPF)
shows the possible combinations of two types of goods that can be produced when available resources are employed efficiently
T or F the PPF does not emphasize the need for choice
false, it does because choice will determine consumption and the capital stock available next period
Things the division of labor does include
takes advantage of individual preferences and natural abilities, allows workers to gain experience in a particular task, reduces the need to shift between different tasks, and allows the introduction of labor saving machinery
T or F Command economies cause a great deal of environmental damage
true
T or F In a pure command economy, it may be difficult to enforce property rights
true
T or F The resources in the economy are not perfectly adaptable to producing both types of goods, therefore the opportunity cost of producing more capital increases when the economy produces more of it
true
T or F in command economies the government owns all resources
true
T or F pure command economies can result in rationed goods
true
T or F the number of command economies who are beginning to embrace the market economy has increased in recent years
true
T or F traditional economies are based primarily on custom and tradition
true
True or False: Resource owners have property rights to the use of their resources and are free to sell them ti the higher bidder. Producers are free to make and sell what they believe will be profitable, and consumers are free to buy whatever they can afford
true
T or F Markets answer the what, how and for whom questions in a pure market economy
true, they provide information about scarcity, as well as incentives to producers and consumers and distribute income to resource suppliers. They guide resources to their most productive use and channel them to consumers who value them most
The problems with pure market economies are:
1. Difficulty enforcing property rights 2. Some people have few resources to sell 3. Some firms try to monopolize markets 4. No public goods 5. externalities 6. economic fluctuations
The three questions economies must answer are:
1. What goods and services will be produced? 2. How will they be produced? 3. For whom will they be produced?
The standards used to distinguish among economic systems include:
1. Who owns the resources 2. What decision making process is used to allocate resources and products 3. What type of incentives drive economic decision makers
The characteristics of a pure command economy are:
1. all resources are government owned and controlled 2. government officials coordinate production 3. ownership of all resources is shared, or communal 4. central planners answer the what, how and for whom questions.
The "invisible hand" of markets
According to Adam Smith, markets coordinate production by an invisible hand. Although each individual pursues their self interest, the invisible hand of market competition promotes the general welfare. Voluntary choices in competitive markets answer the what, how, and for whom questions
T or F In a pure command economy, markets control all resources including labor
False, the state or central authority
True or False: The three economic questions are not interdependent
False, they are
T or F absolute advantage focuses on who uses fewer resources, comparative advantage focuses on what else the resources could have produced, or their opportunity cost
True
Pure market economies do NOT involve a. households b. government c. firms d. factories
b. government
Which question do economies not have to answer? a. how will goods and services be produced b. how many goods and services will be produced c. what goods and services will be produced d. for whom will goods and services be produced
b. how many goods and services will be produced
The US is considered a ______ a. pure market economy b. market economy c. command economy d. transitional economy
b. market economy
Which of these countries has closest to a pure command economy a. Canada b. North Korea c. Australia d. England
b. north korea
absolute advantage
being able to produce something using fewer resources than others require
Which of these answers the three economic questions in a pure market economy? a. culture b. government c. markets d. military
c. markets
Which of the following allows consumers the most choice a. command economy b. transitional economy c. pure market economy d. traditional economy
c. pure market economy
Mixed economy
combines central planning and competitive markets
the best guide for deciding who should do what job is
comparative advantage
Which of these groups would a pure command economy benefit most a. wealthy b. government officials c. highly educated d. general public
d. general public
A pure market economy will most benefit a a. high school dropout b. single mother c. disabled veteran d. middle class businessperson
d. middle class business person
An outward shift of the PPF reflects
economic growth, an expansion of the economy's production possibilities, or ability to produce
Things that cause the PPF to shift outward are
increase in labor force or skill, an increase in the availability of other resources like oil
The US economy is considered a
mixed economy, it is also considered a market economy
Who coordinates the activities of the marketplace?
no individual or small group, individuals make decisions according to incentives
efficiency
producing maximum output using available resources
The rules of the game
the formal and informal institutions that support the economy- the laws, customs, manners and conventions and other institutional underpinnings that encourage people to pursue productive activity
What does the metaphor of the invisible hand illustrate?
the invisible hand of market competition promotes the general welfare
Why have so many command economies allowed a greater role for private ownership and market competition?
the many central planning failures such as the low priority of consumers and little freedom of choice. economies have moved towards a market in order to increase efficiency and compete in a global economy
money
the one thing everyone is willing to accept in exchange for all goods and services
Movement down the PPF indicates
the opportunity cost of producing more capital goods is less consumer goods
privatization
the process of converting government enterprises into private ones
Economic system
the set of mechanisms and institutions used to resolve the what, how, and for whom questions
law of comparative advantage
the worker with the lowest opportunity cost for producing an output should specialize in that output
The PPF shifts inward when
there is a decrease in the availability of resources, such as sandstorms causing people to leave
The role of central planners is
to decide how to produce goods and who will get them, direct production through state run enterprises
T or F Markets play a relatively small role in the US economy
false
T or F the three economic questions are completely independent of one another
false
The simplifying assumptions of the PPF are
1. it focuses on two categories of products, consumer goods and capital goods 2. the focus is on production during a given period 3. the resources available are fixed in both quantity and quality during the period 4. society's technology doesn't change 5.the rules of the game that coordinate production and exchange are also fixed, these include legal systems, property rights, and the customs and conventions of the market
Characteristics of a pure market economy
1. private firms account for all production, there is no government 2. private ownership of all resources 3. coordination of economic activity based on prices generated in free, competitive markets 4. Any income from selling resources goes directly to the resource owner
T or F Command economies ensure that no resources are wasted
false
barter
a system of exchange in which products are traded directly for other products
In which of these economies would some firms have the incentive to monopolize markets? a.) pure market economy b.) pure command economy c.) traditional economy d.) transitional economy
a. pure market economy
T or F Citizens of countries with traditional economies are less likely to experience discrimination than those with market economies
false
Transitional economy
in the process of shifting from a command to a market economy
Other factors that shift the PPF outward include
increase in production of capital goods and technological change, improvements in the rules of the game
division of labor
organizes the production process so that each worker specializes in a separate task
Resources are employed efficiently when
when there is no change that could increase production of one good without decreasing production of another
specialization
when workers focus on individual tasks, enabling them to become more efficient and productive