Chapter 2

Competition

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

Private property

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

Mutually agreeable

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

Let's put dollar amounts on the flows in the circular flow diagram of Figure 2.2. LO 2.5 a. Suppose that businesses buy a total of $100 billion of the four resources (labour, 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 for entrepreneurial ability; (b) $100 billion in revenues. Feedback: (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 (= $45 billion + $55 billion) because household expenditures equal business revenues.

Market

An institution that brings buyers and sellers together

Freedom of enterprise

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 choice

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

Self-interest

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

Suppose Natasha currently makes $50,000 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 a hand-made 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, labour, and capital of $395,000 per year. For the WiFi opportunity, she anticipates costs for land, labour, 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? LO 2.3

(a) Yes; (b) She should pursue the soap business. Feedback: Natasha should quit her job only if the net revenue from the entrepreneurial business opportunity exceeds that of her current wage (net revenue equals revenue minus cost. This could also be defined as accounting profit). For example, consider the following values. Suppose Natasha currently makes $50,000 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 a hand-made soap company. In the other, she will try to develop an internet-based competitor to the cable company. For the soap-making opportunity, she anticipates annual revenue of $465,000 and costs for the necessary land, labour, and capital of $395,000 per year. For the WiFi opportunity, she anticipates costs for land, labour, and capital of $3,250,000 per year as compared to revenues of $3,275,000 per year. 11. Net revenue from the hand-made soap company equals $465,000 (revenue) minus $395,000 (cost). This net revenue of $70,000 (= $465,000 - $395,000) exceeds Natasha's current wage of $50,000, thus she should develop this company instead of working for the TV company. The net revenue from WiFi company equals $3,275,000 (revenue) minus $3,250,000 (cost). This net revenue of $25,000 (= $3,275,000 - $3,250,000) is less than Natasha's current wage of $50,000, thus she should not develop this company and continue working for the TV company. In summary, Natasha should quit her job and start the hand-made soap company.

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. 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: Command system 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: 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: Laissez-faire system

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

False