Chapter 2
An institution that brings buyers and sellers together
Market
The market system depends on private property and the protection of property rights to
provide an incentive to maintain the property and allow for the orderly transfer of property ownership.
The emergence of self-driving cars is an example of "creative destruction" because
self-driving cars will likely replace most cars that require drivers.
How does the market system answer the following fundamental question: How will the system accommodate change?
Through changes in prices and profit.
What each individual or firm believes is best for itself and seeks to obtain
Self-interest
With current technology, suppose a firm is producing 800 loaves of banana bread daily. Also assume that the least-cost combination of resources for producing those loaves is 6 units of labor, 5 units of land, 4 units of capital, and 2 units of entrepreneurial ability, selling at prices of $40, $60, $60, and $20, respectively. Assume the firm can sell these 800 loaves at $1 per unit.
What is the firm's total revenue? $ 800 What is its total cost? $ 820 Calculate the amount of economic profit or loss. $ -20 Will it continue to produce banana bread? No If this firm's situation is typical for the other makers of banana bread, will resources flow toward or away from this bakery good? Away from
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's revenues are $900,000, while costs are $940,000. Who is legally responsible for bearing the $40,000 loss?
Ted and Fred
Franklin, John, Henry, and Harry have decided to pool their financial resources and business skills to open and run a new 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 partnership
a. Price ceilings during a hyperinflation are problematic because b. A Venezuelan-style economic collapse would be less likely in a mixed economy like the United States because
a. many producers will go out of business because the costs of production will soon exceed the legal selling price b. private industry has strong financial incentives to produce efficiently. & corruption is less likely when economic power is more diffused.
a. In a market system, scarce goods are allocated by b. In a command economy, scarce goods are allocated by
a. market prices that are determined by consumers and producers acting in their own self-interest. b. a government-appointed planning board based on the board's long-term priorities.
a. In the circular flow model, b. In the circular flow model, c. In the goods and services portion of the circular flow model, there is a flow of
a. resource markets provide for the exchange of labor and product markets provide for the exchange of goods and services. b. businesses sell goods and buy labor; households buy goods and sell labor c. real goods and services and a flow of money.
a. Consider the following statement: "The market system is a profit-and-loss system." This statement is b. Consider the following statement: "Competition is the disciplinarian of the market economy." This statement is
a. true, because producer decisions are motivated by the attempt to earn profits b. true, because when producers face competition, they are driven to provide goods and services at the lowest possible cost.
Some large hardware stores, such as Home Depot, boast of carrying as many as 20,000 different products in each store. This volume of goods is the result of
the choice of consumers regarding what to purchase to satisfy their wants and the choice of producers regarding what to produce to maximize profits.
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
Freedom of choice
The freedom of firms to obtain economic resources, decide what products to produce with those resources, and sell those products in markets of their choice
Freedom of enterprise
Economic transactions willingly undertaken by both the buyer and the seller because each feels that the transaction will make him or her better off
Mutually agreeable
Which of the following is a characteristic of a market system?
Private ownership of property resources
With current technology, suppose a firm is producing 400 loaves of banana bread daily. Also assume that the least-cost combination of resources for producing those loaves is 5 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.
What is the firm's total revenue? $ 800 What is its total cost? $ 760 Calculate the amount of economic profit or loss. The firm generates an economic profit of $ 40. Will it continue to produce banana bread? Yes If this firm's situation is typical for the other makers of banana bread, will resources flow toward or away from this bakery good? Toward
Using the following circular flow diagram, where the red lines represent real flows and the blue lines represent monetary flows, match the correct letter in the diagram to the description provided.
a. Land, labor, capital, and entrepreneurial activity: H b. Households: B c. Consumer expenditures: E d. Costs: C e. Money income: D f. Resources: G g. Businesses: h. Revenue: F i. Goods and services: I and J
Suppose Natasha currently makes $50,000 per year working as a manager at a cable TV company. She then develops two possible entrepreneurial business opportunities. In one, she will quit her job to start an organic soap company. In the other, she will try to develop an Internet-based competitor to the local cable company. For the soap-making opportunity, she anticipates annual revenue of $465,000. She estimates the costs for the necessary land, labor, and capital to be $395,000 per year. For the Internet opportunity, she anticipates costs for land, labor, and capital of $3,250,000 per year and revenues of $3,275,000 per year.
a. Should she quit her current job to become an entrepreneur? Yes, she should quit her job to become an entrepreneur. b. If she does quit her job, which opportunity would she pursue? She would pursue the soap business.
In market economies, firms rarely worry about the availability of inputs to produce their products, whereas in command economies input availability is a constant concern. This is because
in command economies, no market-pricing mechanism exists to incentivize resource suppliers to increase resource availability when a shortage occurs.
The meaning of the phrase "invisible hand" is that
market prices coordinate the economy by rationing resources and output and by providing incentives to produce the goods and services most desired by society.
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 each see fit
Competition
The right of private persons and firms to obtain, control, employ, dispose of, and bequeath land, capital, and other property
Private property
Decide whether each of the following descriptions most closely corresponds to being part of a command system, a market system, or a laissez-faire system. a. 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. b. Shops stock and sell the goods their customers want, but the government levies a sales tax on each transaction in order to fund elementary schools, public libraries, and welfare programs for the poor. c. 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.
a. Command system b. Market system c. Laissez-faire system
The table below contains information on three techniques for producing $15 worth of bar soap. Assume that we specified "$15 worth of bar soap" because soap costs $3 per bar and all three techniques produce 5 bars of soap ($15 = $3 per bar × 5 bars). So you know each technique produces 5 bars of soap.
a. What technique will you want to use if the price of a bar of soap falls to $2.75? Technique 2 Which technique will you use if the price of a bar of soap rises to $4? Technique 2 Which technique will you use if the price of a bar of soap rises to $5? Technique 2 b. How many bars of soap will you want to produce if the price of a bar of soap falls to $2.00? Zero: It is not profitable to produce bars of soap at this selling price. c. Suppose that the price of soap is again $3 per bar but that the prices of all four resources are now $1 per unit. Which is now the least-profitable technique? Technique 3 d. If the resource prices return to their original levels (those shown in the table) but a new technique is invented that can produce 3 bars of soap (yes, 3 bars, not 5 bars!), using 1 unit of each of the four resources, will firms prefer the new technique? No, they will still prefer technique 2.
Assume that a business firm finds that its profit is greatest when it produces $40 worth of product A. Suppose also that each of the three techniques shown in the table below will produce the desired output.
a. With the resource prices shown, which technique will the firm choose? Technique 2 Why? this technique represents the least-cost combination. Will production using that technique result in profit or loss? Profit What will be the amount of that profit or loss? $6 Will the industry expand or contract? Expand When will that expansion or contraction end? It will end when enough firms enter the market to reduce economic profits to zero.
a. Self-interest helps achieve society's economic goals because b. There is such a wide variety of desired goods and services in a market system because c. What is produced is ultimately determined by
a. as consumers and producers exercise their freedom to act in their own self-interest, markets will produce the desired goods at the lowest possible cost. b. individual wants are diverse. c.consumers, because if the goods offered are not what consumers want, consumers will not buy them.
a. Barter requires that you b. The use of money c. Consider the statement: "We want money only to part with it." When people express a desire to have money, they really want
a. find a person who has what you want and a person who needs what you have to offer. b. provides a common value that makes buying and selling transactions simpler than would be the case with barter. c. the goods and services that money can buy.
a. An advantage of using capital in the production process is that it b. The term "division of labor" means that workers c. When an economy relies on specialization,
a. improves efficiency, increases output, and provides for growth b. specialize in tasks that take advantage of their individual abilities and skills c. trade enables individuals to obtain the goods in which they do not have a specialization.
