ECO-231: Chapter 2: The Market System and the Circular Flow Homework

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

Competition

"Each day, central planners in the old Soviet Union were tasked with setting 27 million prices—correctly."

Invisible hand

What is produced is ultimately determined by

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

Price ceilings during a hyperinflation are problematic because

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

In a market system, scarce goods are allocated by

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

Franklin, John, Henry, and Harry have decided to pool their financial resources and business skills to open and run a new 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 is a

partnership

The use of money

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

In the circular flow model,

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

he term "division of labor" means that workers

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

With current technology, suppose a firm is producing 400 loaves of banana bread daily. Also assume that the least-cost combination of resources for producing those loaves is 10 units of labor, 7 units of land, 2 units of capital, and 1 unit of entrepreneurial ability, selling at prices of $20, $60, $60, and $20, respectively. Assume the firm can sell these 400 loaves at $2 per unit. What is the firm's total revenue? What is its total cost? Calculate the amount of economic profit or loss. Will it continue to produce banana bread? If this firm's situation is typical for the other makers of banana bread, will resources flow toward or away from this bakery good?

$800 $761 39 profit Yes toward

Suppose a company is currently producing 100 chairs per day. Assume the table shows the least-cost combination of resources for producing those 100 chairs. If the company sells these 100 chairs at $5 per unit, what is its total revenue? Using this same information, what is the company's total cost?

500 430

"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."

Creative Destruction

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

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

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

Mixed economies Corruption is less likely strong financial incentives

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 best for itself and seeks to obtain

Self-interest

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

Ted and Fred

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

Those goods and services that result in technological improvements and capital accumulation.

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 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. She estimates the costs for the necessary land, labor, and capital to be $395,000 per year. For the Internet opportunity, she anticipates costs for land, labor, and capital of $3,250,000 per year and revenues of $3,275,000 per year. Should she quit her current job to become an entrepreneur? If she does quit her job, which opportunity would she pursue?

Yes, she should quit her job to become an entrepreneur. She would pursue the soap business.

In a command economy, scarce goods are allocated by

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

Barter requires that you

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

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

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

improves efficiency, increases output, and provides for growth.

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

individual wants are diverse.

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.

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.

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.

"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."

Invisible hand

"Managers in the old Soviet Union often sacrificed product quality and variety because they were being awarded bonuses for quantitative, not qualitative, targets."

Invisible hand

An institution that brings buyers and sellers together

Market

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.