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