Economics Chapter 2

What is consumer sovereignty?

is the idea that because consumers are free to purchase what they want and to refuse products they do not want, they have ultimate control over what is being produced

What is an economic system?

is the way a society uses its scarce resources to satisfy people's unlimited wants and needs

Explain the difference between nationalize and privatize.

nationalize: means to change from private ownership to government or public ownership. privatize: means to change from government or public ownership private ownership.

Does Adam Smith's "invisible hand" function in a traditional economy? Explain.

no because it states that both the producer and consumer gain benefit from the transaction of goods and services and in a traditional economy there is already set production.

What forces have contributed to the growth of the global economy?

opening up the economic globalization, the development of faster, safer, and cheaper transportation, enhancement of cross border business partnerships, sharing research expenses.

What is a market?

place or situation where people buy and sell goods and services

What is laissez-faire economics?

the principle that government should not interfere in the market place

How does the term "laissez faire" apply to economics?

the term is paired with capitalism, an economic system based on private ownership.

What do the three kinds of economic systems have in common?

the three economic systems must answer the economic questions.

Using the circular flow model on page 53 of your textbook, explain how businesses benefit from the wages they pay.

they buy the labor and resources to sell the goods and services at a price they would gain profit.

What are the advantages of a command economy?

they seek to provide for everyone, in addition some resources that may not make money in a market economy can be produced. (Ex. Medicine)

What are the disadvantages of a traditional economy?

traditional economies resist change, making them less productive than they might be with new approaches. they prevent people from doing the jobs they really wanted. people in a traditional economy have a lower standard of living.

What are the characteristics of a market economy?

voluntary exchange in markets, competition and consumer sovereignty, and specialization and markets.

Explain how the three different types of economic systems (traditional, command, and market) answer the three questions that all societies must answer.

-traditional economy: based on customs and tradition -command economy- based on government decisions -market economy: consumer and producer's (choice and self interest)

What are the three questions that all societies must answer?

-what will be produced -how it will be produced -for whom will it be produced

Why is government ownership of the factors of production necessary to achieve communist goals?

This is an authoritarian system therefore it requires absolute obedience.

What are the advantages of a traditional economy?

a society produces what best ensures their survival, the methods of production don't change. in addition there is little disagreement over economic goals and roles

What is voluntary exchange?

a trade in which parties involved anticipate that the benefits will outweigh the cost.

What is a mixed economy?

an economic system that has elements of traditional, command, and market economies.

Why are consumer goods often in short supply in a command economy?

because prices are set low, producer has no incentive, this leads to shortage.

What are the disadvantages of a command economy?

central planners have little understanding of local conditions. workers have little incentives or motivation. command economies face shortage

How are socialism and communism similar? How are they different?

communism and socialism both fall under command economic system, developed from ideas of Karl Marx. Socialism is an economic system in which the government owns some or all of the factors of productions. communism is a more extreme form of socialism in which there is no private ownership of property.

What is specialization?

is a situation in which people concentrate their efforts in the areas in which they have an advantage

What are the advantages of a market economy?

freedom, diversity, is also responsive to changes, profit ensures eficient use of resources, new ideas, and competition.

What did Karl Marx think was the logical outcome of the struggle between owners and workers?

he predicted that in time the workers would overthrow this system and transfer ownership of the factories to public hands

What is a centrally planned economy (command economy)?

in a command economy the government decides what goods and services will be produced, how they will be produced, how will they be produced, and how they will be distributed.

Why do communist countries use authoritarian methods to maintain their economic and political system?

in a communist country government owns all resources and decided how they will be used therefore they need to have full obedience for it to work properly.

Why did Karl Marx the Industrial Revolution created a system of wage slavery?

in the industrial revolution the struggle was between the owners of the great industrial factories and the workers who exchanged their labor for wages, the industrialist grew rich while the workers remained poor.

How does the profit motive help lead to efficient use of productive resources?

inefficiency results in less profit.

In the transition from command to market economies, most economic resources are privatized. What is the expected impact of this action?

privatizing hopes that ownership of resources would provide incentives fro greater efficiency, which will help the economy grow.

What is the difference between a product market and a factor market?

produt market: final goods are bought and sold (Buyer-Individual, Seller-Business) factor market: factors of production are bought and sold-raw material (Seller- individual, Buyer- Business)

What disadvantages of a market economy call for government involvement?

pure market economy cannot call for public goods and services, natial defense, security. in addition, there is unequal distribution of wealth.

What drives the choices of consumers and producers in a market economy?

self interest drives the choices of consumer and producer

In what ways does self-interest shape the nature of a market economy?

self interest is behind two features of a command economy: private property rights, and the market (Place where goods and service are sold)

How are the goals of socialism met by allowing both government ownership and private ownership of resources?

socialism is a less authoritarian government system therefore it has to have some private ownership.

What is competition?

the effort of two or more people acting independently to get the business of others by offering the best deal