Economics Chp. 2 & 3 Study Guide

In a free enterprise system, which "building block" owns most of the country's economic resources?

Households

Who/ what answers the questions of what to produce, how to produce, and for whom to produce in a market, traditional, and command economy? (3 different answers)

In a market economy, the people answer the questions. In a traditional economy, rituals, habits, or customs answer the questions. In a command economy, a central authority answers the questions.

What is inflation?

Rise in the general level of prices

What are the two results of adding competition to a market?

• It results in greater efficiency & lower prices, because the companies are looking for an edge over their competition. • The products become better & more user friendly.

List the three functions of an economic system.

● It provides for the needs in an economy. ● The 3 questions that are answered are WHAT, HOW, & FOR WHO to produce. ● It provides for the wants of an economy.

What are the four "building blocks" of a free enterprise system? Explain each building block's role in the system. (Look back at the Free Enterprise Reading Questions for help)

1. Households- Own most of the country's economic resources & decide how to use them. 2. Businesses- Organize economic resources to make a good/service. 3. Markets- Bring buyers & sellers together 4. Government- Define & enforce rules of society.

What is a mixed economy? Provide an example of a nation with a mixed economy.

A mixed economy is an economic system that has a combination of characteristics from traditional, market, & command economies. Example: United States

Name two advantages and two disadvantages of a mixed economy.

Advantages: Can contribute to economic progress & change. Ability to provide programs & services to people. Disadvantages: Payment is required for programs provided. Taking resources away from something else to provide the programs.

What are the benefits of a free enterprise economy? What are the disadvantages?

Benefits: Individual Freedom, Variety of Goods, Ability to adapt to Change, Promoting Progress, & Creation of Wealth. Disadvantages: Uneven Economic Growth, Growing Gaps between Rich & Poor, Large "Supply-Side" Tendencies, Rights & Responsibilities of Businesses

What is capitalism? What is a free market? If an economy has capitalism and free markets, what is it said to be based on?

Capitalism is an economic system in which private citizens own & use all 4 factors of production in order to generate profits. A free market is where products can be bought & sold without government regulation & interference. It's said to be based on free enterprise.

What is a mixed market economy?

Combination of free market features with elements of other types of economic systems.

What allows a free enterprise system to work?

Competition, Voluntary Exchange, People Pursuing their own Interest

What is profit?

Difference between the revenue from sales & the full opportunity cost of resources involved in producing the sales.

What does "consumers vote with their dollars" mean?

Directing production towards the goods & services they want businesses to provide.

What is communism?

Economic & political system in which the 4 factors of production are collectively owned & directed by the state; a theoretically classless society in which everyone works for the common good.

What are the seven economic and social goals of the United States?

Economic Freedom, Economic Efficiency, Economic Equity, Economic Security, Full Employment, Price Stability, & Economic Growth.

What are the five important characteristics in a capitalistic free enterprise economy?

Economic Freedom, Voluntary Exchange, Private Property, Profit Motive, & Competition

What is socialism?

Economic system in which government owns some factors of production & has a role in determining what & how goods are produced.

Explain why when an entrepreneur is successful, everyone is successful.

Entrepreneurs make profits, & business growth. Workers get more jobs & better wages. Consumers get new & better products. Government gets more economic activity & more tax revenue. Businesses bring other businesses in, which leads to competition.

What is the role of the entrepreneur in a free enterprise economy?

Organize land, capital & labor to get a profit.

Why is full employment beneficial?

People need jobs to support themselves & their families.

What are conflicts that occur when trying to achieve the economic & social goals of US? How do we work to resolve these conflicts?

Sometimes, the goals are in conflict with one another. There are opportunity costs associated with trying to achieve the goals. How we vote determines how we address the conflict & opportunity costs between goals.

What role does government play in a free enterprise system?

They define & enforce the rules of society & provide goods that private businesses don't.