Economics Chapter two study set
The Price Mechanism
Determines the types of goods and services to be produced the method in which they will be produced and the allocation of finished products.
Something such as a reward or bonus that encourages people to behave in a certain way could be called
an incentive
How should goods and services be produced?
(How to use our resources to produce goods and services) Ex. Should teachers have classes of 50 or classes of 20. Concrete ex. (Hand Tools) 1 acre of land + 56 worker-hours+ capital (garden tools) = 15 bushels of wheat. (Modern mechanical equipment) 1 acre of land + 2.9 worker-hours + Capital (truck) = 40 bushels of wheat. With todays tools farming is much more efficient. 40 bushels of wheat can be harvested with just 2.9 worker-hours.
Why do markets exists?
-Because no one is self sufficient -No one produces all we require to satisfy our needs and wants -Market allows us to exchange the things we have for the things we want
Traditional Economy
-Existence was primarily based on traditions and customs -barter was the main form of trading -individuals existed on a subsistence level -the decision of what, how and for whom was determined by customs and traditions -resources were owned or controlled by a sovereign
Self Interest
-Motivating force in the free market economy -Each transaction the buyers and sellers consider their self interest (personal gain)
Competition
-Regulating Force in a free market -Firms seek to make greater profits by increasing sales Ex: A shirt manufacturer realizes that striped shirts are a hot topic. The manufacturer has the incentive (hope/ reward) from more potential sales and profits to produce more striped shirts. Second Ex: 1 manufacturer charges 30 for a striped shirt. Another manufacturer charges 25 for a striped shirt, if another manufacturer wanted to sell striped shirts they would have to lower the price because consumers will always look for the lower price.
Monetary flow (outer ring)
-Represents the flow of money Left-Right: Households pay firms for goods and services Right-Left: Firms pay households for land labor and capital
Physical flow (inner ring)
-Represents the flow of resources and products Left-Right: Households supply firms with land labor and capital Right-Left: Firms supply households with goods and services
Specialization
-The concentration of the productive efforts of individuals and firms on a limited number of activities -Instead of being self sufficient each of us produces one or a few products -Specialization leads to efficient use of resources including land, labor, and capital
Free market
-economic systems that are based on voluntary exchanges in markets -In a free market system individuals and privately owned businesses own the factors of production make what they want and buy what they want -A free market works best in a environment of decentralized decision making (U.S)
Adam Smith
A Scottish social philosopher who in 1776 published a book called "The Wealth of Nations" in which he described how the market functions
Circular Flow Diagram
A circular flow diagram shows at a glance how individuals and businesses exchange money and resources and products in the market place
A mixed economy is?
A market-based economic system based on free enterprise with some government involvement
The method used by a society to produce and distribute goods and services is
An economic system
A centrally planned economy is?
An economic system in which the government makes all the decisions about production and consumption of goods and services
Examples of Mixed Economies
Caribbean Region United States
Which of the following countries is in transition from a centrally planned economy to a market based system
China
Free Market economic growth advantage
Competition encourages innovation free markets encourage growth. Entrepreneurs are always looking for profitable opportunities contributing new ideas and innovations
Self interest + Competition
Consumers get the products they want at prices that closely reflect the cost of producing them
What goods and services should be produced?
Each society must decide what to produce in order to satisfy its needs and wants. Obviously every society needs food and shelter. Modern societies face many additional significant considerations. Like how much of our resources should we devote to national defense, education, public health and welfare or consumer goods. Which consumer goods should we produce. Each production decision that a society makes comes at a opportunity cost
Mixed economy features
Economic decisions are taken by the price mechanism system and also by state The aim of the private sector is to maximize profits while the aim of the private sector is to maximize social welfare
Why is economic equity difficult to achieve in a free market economy?
Economic equity is difficult to achieve in a free market economy because people have different types of skills and different levels of ambition. In a free market economy, this means that people will not be able to get the same amount of wealth. Therefore, economic equity will be hard to achieve.
Traditional Economic Advantages
Every member of society knows exactly what they are to do there is a strong social network positions within society are already established life is generally stable, predictable and continuous
The income people receive for supplying factors of production such as land labor or capital are
Factor payments
Firms
Firms transform inputs (factors of production) into outputs (products)
Free Market additional goals advantage
Free markets offer a wider variety of goods and services because producers have incentives to meet consumers desires consumers decide what gets produced
Market economies modern
Government intervention has become greater because some needs and wants of modern society are difficult to answer in the market place. Some needs markets could meet fall to governments so that all members of society can participate. Ex: Education, Health care, and mass transit
Why do governments provide safety nets for their citizens?
Governments provide safety nets for their citizens because it helps protect them from economic conditions like shortages, injuries, natural disasters. Additionally, governments provide safety nets because they believe that those who retire should be able to support themselves in the future.
Government in the Product Market
Governments purchase goods and services in the product market. Governments also provide certain goods and services through the factor resources that they combine. The federal, state, and local government in the U.S. for example provide 4 million miles of roads
With "Centrally planned" on the left and "Free Market" on the left which of the following countries economic system would be farthest to the right on the continuum of mixed economies?
Hong Kong
Mixed economies where the market dominates
Hong Kong Private sectors rule. the government protects private property and does not interfere in the free market aside from establishing wage and price controls on rent.
Households
Households own the factors of production. Households are also the consumers of goods and services
Why do centrally planned economies have a difficulty meeting consumer needs?
In a centrally planned economy, the government owns all production factors. Since the government makes all the economic decisions, workers lack the incentive to work faster or produce more. The large, bureaucracy needed to make thousands of economic decisions hurts efficiency as well. It is expensive to run and lacks the flexibility to adjust quickly to consumer demands and changing economic conditions and D beacuse ....
You and your friends decide to earn money by washing cars. How are the three economic questions answered in this market?
In this market( washing cars), the three economic questions are answered by figuring out whether or not the company should have 15 car stations or 30 car stations. ( How should goods and services be produced?) Who gets to drive a new and punctiliously cleaned car and who can only afford a medium cleaning for their car.( Who consumes these goods and services?) And how much of the the company's resources should we devote to public health or consumer goods? ( What goods and services should be produced?)
Incentives
Incentives come in two forms -Monetary incentive: and incentive in the form of money -Nonmonetary incentive: and incentives in the form of gifts, services, and other goods
Government in the Factor Market
Just like businesses the government purchases land labor and capital from households in the factor market. Ex: The U.S. pays 2.8 million citizens 9.7 billions dollars a year for their labor
Free Market Advantages
Manufacturers are free to produce what the consumers demand and the consumers in turn are free to spend their money as they see it fit the decision of what to produce is not controlled by government a huge variety of goods and services are produced to satisfy their needs and wants of consumers there is freedom from government interference efficient production is promoted since resources are allocated to their most profitable use competition among firms improves quality keeps prices low and spurs new technology and innovation
Mixed economy where the government dominates
North Korea The government own all the property and all economic output. Almost all imports are banned and production of goods and services by foreign companies are forbidden.
Traditional Economic Disadvantages
Often very slow to change Does not take advantage of technological change Relatively little promotion of intellectual and scientific development Insufficient provisions of goods and services Inadequate use of skill in relation to the factor of production No upward movement of labor takes place
Transferring money
On the circular flow model of a mixed economy the monetary flow the government collects taxes from both households and businesses Governments then transfer the money they collect to businesses and individuals for a variety of reasons, ranging from worker disabilities to the survival of an industry. (U.S. social security)
Free Market Disadvantage
Since there is no government intervention, consumers could be exploited through the charging of higher prices for essential goods and services leads to great inequalities as the few rich get richer and the many poor get poorer there is much pollution especially when industrialization gets developed there is over consumption of demerit goods such as alcohol cigarettes and drugs
Who consumes goods and services
Societies must decide how to distribute the available goods and services. Most societies distribute income through factor payments. Ex. Landowners receive rent workers receive wages and entrepreneurs receive profits if their enterprises succeed. The quest of Who gets to consume which good and services lies at the very heart of the differences between economies systems today. Every society answers the question of distribution based on its unique combination of social goals and values.
Why have some nation begun a transition to free enterprise
Some Nations begin a transition to free enterprise because the people want to control what goes on in the marketplace instead of the government choosing for them
What benefits might citizens of a centrally planned economy derive from a move toward a market based system?
Some benefits citizens of a centrally planned economy derive from a move toward market based system are: Greater efficiency of resource use. Fewer shortages. Faster rate of economic growth Higher living standards Personal freedom to make choices
Examples Traditional economic system
South Africa, Africa and Asia
How does specialization make us more efficient?
Specialization makes us more efficient because it is much easier to learn one task or a few tasks very well than to learn them all. By specializing in one craft we are able to create more products and create economic growth
Examples of a command economy
The Former soviet union china until the 1980's and the 1990's Cuba until the 1990's north Korea
Command economic System features
The State -controls all economic activity -makes all decisions regarding economic activities -decides what goods are produced how much of each good to produce and how much people should get
The U.S. Government
The U.S has a free enterprise economy. The government still intervenes to keep order and provide vital services. Some people want more government intervention while others think the government already intervenes enough The U.S has a high level of economic freedom and the U.S. law protects private property.
Free Market economic freedom advantage
The free market allows workers to work where they want and allows firms to produce what they want
Free Market economic efficiency advantage
The free market is self regulating Producers make only what consumers want when they want it at affordable prices
Free Market/Socialists Features
The government plays a little role in the economic activity Emphasizes on the freedom of individuals (consumers and producers) The private sectors (private firms and individuals) answer the basic questions There is consumer sovereignty Profit maximization is the main goal in this economy The price mechanism determines price in this economy
Mixed economy advantage
The state can intervene in areas of the economy through the passing of laws to protect citizens from unfair trading practices both the government and the private sector can cooperate in offering certain services Ex: transportation, health care
Examples of Free Market
There is no real life example of a purely free market economy, this only exists in theory
What is the purpose of a firm
To produce goods and services
Mixed Economy disadvantage
Too much government regulation might dampen the free enterprise spirit some state-owned industries are allowed to operate inefficiently thus wasting resources inequitable distribution of wealth can also arise
In which economy do communities have a low standard of living?
Traditional economy
How do a traditional economy, a market economy, a command economy, and a mixed economy differ?
Traditional- economic system that relies on habit, custom, or ritual to decide questions of production and consumption of goods and services Market-economic system in which decisions on production and consumption of goods and services are based on voluntary exchange in markets Command-economic system in which a central authority is in command of the economy; a centrally planned economy Mixed-market based economic system with limited government involvement
Traditional economy
Very little room for innovation and change. Boys tend to take up the occupation of their father while girls follow in the foot steps of their mothers. traditional economies are usually economies that stay small and close. These societies work to support entire groups. These communities lack modern convinces and have a low standard of living
Which of the following are the key economic questions every society must answer
What goods and services should be produced? How should good and services be produced? Who consumes goods and services?
Provide at least three real world examples to illustrate the circular flow market economy?
You get a job at a Law Firm. They pay you for your services Uber has an agreement with the Government so, if an Uber Car gets into an accident, the police must come. Because you work as a bus driver, the government provides you with benefits like healthcare, free movie tickets, etc.
factor market
a market in which firms purchase the factors of production from house holds -Firms purchase factors of production from households= Factor market Ex: Firms purchase or rent land (natural resource). They hire workers paying them wages or salaries for their labor. They borrow money from households to buy capital paying households interest or profits in return
Government programs that protect people experiencing unfavorable economic s=conditions are?
a safety net
How a society answers the key economic questions primarily depends on?
a society's goals and values
The invisible hand is
a term economists use to describe the self regulating nature of the market place
In the study of economics the definition of a market is
an arrangement that allows buyers and sellers to exchange things
Traditional economy
an economy that relies on habit, custom, or ritual to decide what to produce how to produce it and or whom to distribute it
economic security and predictability
assurance that goods and services will be available payments will be made on time and a safety net will protect individuals in times of economic disaster
Why do markets exists
because people are not self sufficient and need goals and services produced by others
In a centrally planned economy the three key economic questions are answered by the
central government alone
The struggle among producers for consumer dollars is
competition
According to Adam Smith, what are the two factors that regulate a market place
competition and self interest.
A household is a person or a group of people who live in the same residence. In economics, households are also
consumers of goods and services
market economy
economic system in which decisions on production and consumption of goods and services are based on voluntary exchange markets
centrally planned economies
economic system in which the central government makes all the decisions on the production and consumption of goods and services
economic equity
fair distribution of wealth
An economic system characterized by private or corporate ownership of capital goods, investments that are determined by private decision rather than state control?
free enterprise
economic freedom
freedom from government intervention in the production and distribution of goods and services
safety net
government programs that protect people experiencing unfavorable economic conventions
What has been mostly responsible for advancing from the agricultural age to the industrial age?
innovation
economic growth and innovation
innovation leads to economic growth and economic growth leads to a higher standard of living
Economic efficiency
making the most out of resources
mixed economy
market based economic system with limited government involvement
Command economy disadvantage
no freedom of choice for consumers or producers System is too to adjust when changes occur can result in shortages conflicts of interest can arise because what the country needs may not be what the country wants
property owned by individuals or companies not by the government or the people as a whole
private property
To sell state-run firms to individuals is to
privatize
A continuum is a
range with no clear divisions
which of the following goods is provided by the U.S government rather than by individuals
roads
Why do governments fulfill some of society's needs such as education health care and mass transit
so that all members of society can participate
which of the following is not a main priority of the united states
subsidizing business to keep product prices low
Laissez faire
the doctrine that states that government generally should not intervene in the market place
factor payments
the income people receive for supplying factors of production land labor and capital or entrepreneurship
product market
the market in which households purchase the goods and services that firms produce. -Households purchase the products made by firms with the money they received from working for firms in the factor market
economic system
the method used by a society to produce and distribute goods and services
Consumer sovereignty is
the power of consumers to decide what gets produced
Command economy advantages
the welfare of all citizens is a primary goal full employment of all available resources governments possess the information to be able to direct resources wasteful competition is avoided there is no industrial unrest such as striking as the government controls wages
Which of the following is and= example of competition in the market?
A small town has only two grocery stores, which are located one block away from eachother
other goods
societies pursue additional goals such as environmental protection
