Microeconomics Chapter 2

market

An institution that brings buyers and sellers together

mutually agreeable

Economic transactions willingly undertaken by both the buyer and the seller because each feels that the transaction will make him or her better off

true or false households sell finished products to businesses

false

With current technology, suppose a firm is producing 400 loaves of banana bread daily. Also assume that the least-cost combination of resources in producing those loaves is 6 units of labor, 7 units of land, 2 units of capital, and 1 unit of entrepreneurial ability, selling at prices of $40, $60, $60, and $20, respectively. Assume the firm can sell these 400 loaves at $2 per unit. ( a ) What is the firm's total revenue? ( b ) What is its total cost? ( c ) calculate the amount of economic profit or loss ( d ) will it continue to produce banana bread?

( a ) $800 To calculate total revenue multiply the selling price by the number of units sold. Total revenue equals $2 (price) multiplied by 400 (loaves of bread sold). So, total revenue equals $800. ( b ) $800 To calculate total cost multiply each input usage (number of units employed) by the price of the input and then add these values together. Total cost equals 6 × $40 (cost of labor) + 7 × $60 (cost of land) + 2 × $60 (cost of capital) + 1 × $20 (cost of entrepreneurial ability) = $800 ( c )The profit/loss for this firm equals total revenue minus total cost. Here, profit/loss equals $800 (total revenue) minus $800 (total cost) = $0. If total revenue is greater than total cost, the firm will have a profit; but if total cost is greater than total revenue, the firm will have a loss. ( d ) If the firm is earning positive, including zero, economic profit, it will continue to produce banana bread. However, if the firm is losing money (suffering a loss because total cost exceeds total revenue), it will stop producing banana bread.

freedom of enterprise

The freedom of firms to obtain economic resources, to use those resources to produce products of the firm's own choosing, and to sell their products in markets of their choice.

freedom of choice

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

competition

The presence in a market of independent buyers and sellers competing with one another along with the freedom of buyers and sellers to enter and leave the market.

private property

The right of private persons and firms to obtain, own, control, employ, dispose of, and bequeath land, capital, and other property.

self-interest

What each individual or firm believes is best for itself and seeks to obtain

true or false money must be issued by a government for people to accept it.

false

Franklin, John, Henry, and Harry have decided to pool their financial resources and business skills in order to open up and run a coffee shop. They will share any profits or losses that the business generates and will be personally responsible for making good on any debt that their business undertakes. Their business is a: a. corporation b. sole proprietorship c. partnership d. none of the above

c. partnership

decide whether the following description corresponds to being part of a command system, a market system, or a laissez-faire system. 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 the area

command system

What is produced is ultimately determined by....

consumers because if the goods offered are not what consumers want, consumers will not buy them

Identify the quote as being associated with either the concept of the invisible hand or the concept of creative destruction "if you compare a list of today's most powerful and profitable companies with a similar list from 30 years ago, you will see lots of new entries."

creative destruction

Ted and Fred are the owners of a gas station. They invested $150,000 each and pay an employee named Lawrence $35,000 per year. This year revenues are $900,000, while costs are $940,000. Who is legally responsible for bearing the $40,000 loss? a. Lawrence b. Ted c. Fred d. Ted and Fred e. Ted. Fred, and Lawerence

d. Ted and Fred

Identify the quote as being associated with either the concept of the invisible hand or the concept of creative destruction "it is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest

invisible hand

decide whether the following description corresponds to being part of a command system, a market system, or a laissez-faire system. 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

decide whether the following description corresponds to being part of a command system, a market system, or a laissez-faire system. 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

econimic systems

set of institutionalized arrangements, coordinating mechanism