Homework #2: The Market System

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Suppose that businesses buy a total of $100 billion of the four resources (labor, land, capital, and entrepreneurial ability) from households. If households receive $60 billion in wages, $10 billion in rent, and $20 billion in interest, how much are households paid for providing entrepreneurial ability?

$10 billion

If households spend $55 billion on goods and $45 billion on services, how much in revenues do businesses receive in the product market?

$100 billion

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 see fit competition

Competition

The only taxes levied by the government are to pay for national defense, law enforcement, and a legal system designed to enforce contracts between private citizens

Laissez-Faire System

An institution that brings buyers and sellers together

Market

Shops stock and sell the goods customers want but the government levies a sales tax on each transaction to fund elementary schools, public libraries, and welfare programs

Market System

In terms of the circular flow diagram, households make expenditures in the _____ market and receive income through the ________ market

product, resource

Two major virtues of the market system are that it

Allocates resources efficiently and allows economic freedom.

"Consumer sovereignty" means that

Buyers determine what will be produced based on their "dollar votes" for the goods and services offered by sellers.

A woman who wants to start a flower shop finds she cannot do so unless the central government has already decided to allow a flower shop in her area

Command System

Private Property

Encourages owners to maintain or improve their property so as to preserve or enhance value.

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 qualifies; and of consumers to spend their incomes in whatever way they feel is most appropriate

Freedom of Choice

The freedom of firms to obtain economic resources, decide what products to produce with those resources, and sell those products in market of their choice

Freedom of Enterprise

The term "Laissez-faire" suggest that

Government should not interfere with the operation of the economy.

In the resource market,

Households sell resources to businesses

Which of the following is a distinguishing feature of laissez-faire capitalism? a.) Public ownership of all capital. b.) Central planning. c.) Minimal government intervention. d.) A circular flow of goods, resources, and money.

Minimal government intervention.

Economic transactions willingly undertaken by both the buyer and the seller because each feels that the transaction will make him/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

Households and businesses are:

Sellers in the resource and product markets respectively.

A fundamental difference between the command system and laissez-faire capitalism is that, in command systems,

The division of output is decided by central planning rather than by individuals operating freely through markets

Competition means that

There are independently-acting buyers and sellers in each market.

The incentive problem under communist central planning refers to the idea that

Workers, managers, and entrepreneurs could not personally gain by responding to shortages or surpluses or by introducing new and improved products


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