Chapter 2

True or false: Competition among sellers and government diffuses economic power within the economic units that make up an economy.

False

True or false: Money complicates exchange or trade.

False

True or false: Specialization means using available resources to produce a variety of goods and services.

False

True or false: The resource market is the place where resources or the services of households are produced.

False

Which of the following best illustrates exchange through barter?

Farmer John trades his corn for some of his neighbor's oranges

According to the circular flow model, ______ will buy resources from and sell products to households.

Firms

Which of the following ensures that entrepreneurs and private businesses are free to obtain and use economic resources to produce their choice of goods and services?

Freedom of enterprise

The name of the 1776 book authored by Adam Smith noting that the operation of a market economy creates unity between private and social interests is called ______.

The Wealth of Nations

The most important feature of property rights is that they ______.

encourage cooperation by ensuring that only mutually agreeable economic transactions take place

The title to an automobile or the deed to a cattle ranch assures a buyer that the seller is the legitimate owner of that property. This is an example of property rights _________.

facilitating exchange

In the circular flow model ______.

households spend their income in the product market

The interaction between buyers and sellers in a market system determines ______.

product and resource price

The function of firms in the circular flow model is to ______ resources and ______ products.

purchase; sell

A firm's owners are called ______ because they are only paid after employees, suppliers, and lenders have been paid.

residual claimants

When every economic unit in a society attempts to achieve its own particular goal, usually requiring delivering something of value to others, it is referred to as ______.

self-interest

In the circular flow model, households ______ resources and ______ products.

sell; buy

Goods and services are produced efficiently when production is organized in combinations and ways ______.

that minimize the cost per unit of output

Product and resource prices in a market system are determined by ______.

the interaction between buyers and sellers

In a market economy, goods and services are distributed ______.

to consumers on the basis of their ability and willingness to pay the existing market price

The term "laissez-faire" refers to

limiting the government's interference in the economy.

Under the market system, ______ coordinate the decisions made by households and businesses.

markets and prices

Money performs several functions, but first and foremost it is a ______.

medium of exchange

Competition among economic units ______.

-implies that producers can enter or leave an industry -diffuses economic power within the businesses and households that make up the economy

Private individuals and businesses are able to utilize property as they wish as a result of:

-the ability to negotiate legally binding contracts. -the right of private property.

Which of the following is the reason why every society needs to develop an economic system?

Every society faces the economizing problem.

Which of the following occur in the resource market?

-Businesses buy resources from households because they are necessary for producing goods and services. -Households sell resources and businesses buy them. -Households provide economic resources directly as workers or entrepreneurs.

Which of the following best describe how goods and services should be produced?

-By locating production facilities optimally to hold down production and transportation expenses -By utilizing the right mix of labor and capital

How does the profit system guide entrepreneurs?

-By punishing them with losses when they choose poorly -By rewarding them with profits when they choose wisely

What is the command system also known as? (Check all that apply.)

-Communism -Socialism

Which of the following collectively direct resources to industries that are meeting consumer wants and away from industries that are not meeting consumer wants? (Check all that apply.)

-Consumer sovereignty -Dollar votes

Which of the following are reasons why the command economies of the former Soviet Union and of Eastern Europe failed? (Check all that apply.)

-Coordination problems -Incentive problems

Which of the following does competition require?

-Freedom of sellers and buyers to enter or leave markets. -Two or more buyers and two or more sellers acting independently in a particular market.

Which of the following characteristics define a command system? (Check all that apply.)

-Government ownership of most or all resources -A government-appointed central planning board

Identify the five fundamental questions that all economies, whether market or command, must address.

-How will the system accommodate change? -How will the goods and services be produced? -How will the system promote progress? -Who will get the goods and services? -What goods and services will be produced?

Which of the following functions can a corporation do on its own behalf?

-Incur debts -Own assets -Acquire resources -Sue others

Which statements about the profit system are true?

-It is actually a profit and loss system. -It encourages entrepreneurs to make prudent decisions.

Which of the following does competition imply?

-It provides the economy with the flexibility needed to remain efficient over time. -No insurmountable barriers prevent an industry from expanding or contracting. -It enables the economy to adjust to changes in consumer tastes, technology, and resource availability.

If increasing numbers of consumers decide to purchase organically farmed fruit rather than conventionally farmed fruit, how is the market likely to respond?

-Organic fruit profits will rise. -Conventional fruit profits will fall.

Which of the following are true of the partnership form of business organization?

-Partners pool financial resources and business skills. -Partners share profits and losses.

Freedom of entry and exit of producers enables an economy to adjust to changes in which of the following areas?

-Resource availability -Consumer tastes -Technology

Human specialization or division of labor contributes to a society's output in which of the following ways?

-Specialization fosters learning by doing. -Specialization saves time. -Specialization makes use of differences in ability.

Which of the following describes a technological advancement?

-The ability of a firm or entrepreneur to gain revenue and economic profit at the expense of rivals by introducing a popular new product -The ability to produce better products and processes to replace inferior ones -New and improved methods that reduce production and/or distribution costs

Choose those characteristics that best describe a command system.

-The government owns most property resources. -A central planning board makes all economic decisions concerning resources.

Which of the following best describe the virtue of efficiency?

-The market system promotes the efficient use of resources by guiding them into the production of the goods and services most wanted by society. -The market encourages the development and adoption of new and more efficient production techniques.

Which of the following correctly state the importance of advanced technology and capital goods? (Check all that apply.)

-The most direct methods of producing a good or service are often the least efficient. -The new technology can enhance the productivity of workers.

Which of the following statements describe who will get the goods and services produced in a market economy?

-Those who are willing and able to pay for the goods and services -Those who have sufficient income and want to spend money on a particular good

Which of the following are components of the circular flow model?

-businesses -households -resource market -product market

Three virtues of the market system include ____, _____, and ______.

-freedom -efficiency -incentives

Identify the three virtues of the market system.

1. Efficiency 2. Incentives 3. Freedom

The five questions that every society must address reflect the reality of (scarce/infinite) resources in a world of (limited/unlimited) wants. (Choose your answer from the options given within parentheses.)

1. Scarce 2. Unlimited

In order to have competition in a market economy, there must be at least _____ or more sellers acting independently in a particular market.

2

The operation of ______ creates a curious unity between private interests and social interests.

A Market System

Which of the following is true of a market system?

A market system is a combination of centralized government initiatives and decentralized actions taken by firms.

Which of the following requires a coincidence of wants between a buyer and a seller?

Barter

In the circular flow model, households sell resources to and buy products from _______.

Businesses

Which of the following would be an example of the system accommodating change?

Buyers want more juice and less milk. Producers increase spending only on juice.

How does the market system develop methods for analyzing and managing risk?

By presenting businesses with the economic consequences of their decisions

Communism exhibits all the characteristics of a ______ system.

Command

The market system depends on ______ both among buyers and among sellers.

Competition

Two or more buyers and two or more sellers acting independently in a particular product market with the freedom to enter and leave the market best describes ______.

Competition

Which type of business structure is considered an independent legal entity?

Corporation

In recent years, new MP3 and digital technologies have replaced compact disks. This is an example of ______.

Creative destruction

______ is the human specialization of some process.

Division of Labor

A(n) ______ system is a particular set of institutional arrangements and a coordinating mechanism that responds to the economizing problem.

Economic

The market system directs resources to the production of goods and services that are the most desired by society. Which market system virtue does this reflect?

Efficency

Freedom of ________ ensures that entrepreneurs and private businesses are free to obtain and use economic resources to produce their choice of goods and services.

Enterprise

Which is considered to be "pure capitalism," in which the role of government is essentially limited to that of protecting private property and establishing a legal environment for enforcing contracts and market activity?

Laissez-faire capitalism

An __________ is an institution or mechanism that brings buyers and sellers into contact. (Enter one word in the blank.)

Market

In a _______ system, people act in their own self-interest.

Market

Private individuals and firms, not the government, own most of the property resources such as land and capital in a free _______ system.

Market

Which of the following represents an institution or mechanism that brings buyers and sellers into contact?

Market

In which of the following do private individuals and firms own most of the property resources such as land and capital?

Market System

An active, but limited, government is characteristic of which type of economic system in modern advanced industrial economies?

Modern market system

Which of the following is true when there are many buyers and sellers acting independently in a market?

No single buyer or seller can dictate the price of the product or resource because others can undercut that price.

The market system attracts inputs and focuses owners' attention on risk management by restricting business risk to which two groups?

Owners and investors

What is the type of business structure when two or more individuals agree to own and operate a business together?

Partnership

What is the coordinating mechanism in a market system?

Prices

______ ownership of capital gives capitalism its name.

Private

_______________ property rights help to facilitate exchange in a free market system.

Private

Mutually agreeable economic transactions take place as a result of:

Property rights

The "invisible hand" guides firms and resource suppliers to promote ______ even as they seek to further their own interests.

Public or social interests

Technological improvements or advancements also include new and improved methods that ______ production costs.

Reduce

A __________ proprietorship is a business owned and managed by a single person.

Sole

_____________ is the use of resources by an individual, firm, region, or nation to produce one or a few goods or services rather than the entire range of goods and services.

Specialization

Which of the following is characterized by the private ownership of resources and the use of markets to coordinate and direct economic activity?

The market system

True or false: In a market system, consumers exercise consumer sovereignty, which is crucial in determining the types and quantities of goods produced.

True

Which of the following is the most efficient method of production?

Using a combination of labor, capital and technology

Modern market economies usually have a(n) ______.

active, but limited government

Technological advancements, such as the personal computer and medical discoveries, are primarily driven by the profit motive. However, such advancements eventually promote the public or social interest as though they are guided by _____.

an invisible hand

For a market system to maximize its potential, it must develop methods for ______.

assessing and managing risk

The two major benefits that arise from the market system's restriction of business risk to owners and investors are

attracting inputs and focusing attention.

The product market is the place where _______.

businesses sell goods and services and households buy goods and services

The basis of competition is freedom of ______ exercised in the pursuit of ______.

choice; money

In the circular flow model, the market economy creates ______.

continuous flows of goods and services, resources, and money

The creation of new products and production methods that completely destroys the market positions of firms that are wedded to existing products and older ways of doing business is called _____.

creative destruction

In a market system, firm __________ are subject to business risk.

owners

Rather than produce a wide array of goods and services, it is more efficient for economies to produce goods and services based upon ______.

specialization

The goods and services produced by an economic unit through ______ can be exchanged for a full range of desired products produced by other economic units.

specialization