Chapter 3 Objectives

Identify and explain several reasons why we give up the security of total independence for the vulnerability of interdependence.

1. Interdependence is inevitable because the resources on this ear are finite. There are costs, but there are also benefits to interaction. Specialization allows for increased productivity, which everyone benefits from.

Describe the role of financial capital in a market system.

1. Money is financial capital, which finances and facilitates exchanges that make production possible.

Name the famous book that Adam Smith wrote about economics, and give the year it was first published.

1. Wealth of Nations- 1776

Define: gains from trade.

10. Gains from trade are when an exchange of surpluses is properly coordinated.

Demonstrate the benefits of division of labor and exchange with an example of the gains from trade when labor is divided.

11. When we specialize in something we have more huts, more food, and more clothes than we would have if we produced all of these things ourselves.

Explain the concept: absolute advantage.

12. Absolute advantage is that if each of us is absolutely better at doing something.

Explain the concept: comparative advantage.

13. Comparative advantage is the ability to produce a good at a lower opportunity cost than the person or the country one trades with, making trade beneficial.

Identify the term used to describe the market condition when there is either an excess supply or an excess demand in the market.

13. Equilibrium is when there is no excess supply or excess demand.

Explain why a disequilibrium is not a stable condition in a perfectly competitive market.

14. Disequilibrium is a situation when the market is out of balance. In a perfectly competitive market, this is not a stable position and prices will just adjust to clear the market.

Identify the condition that limits the division of labor. Explain with an example.

14. The division of labor is limited by the extent of the market. It is pointless to specialize if there is not enough demand in the market.

Describe how the development of "highways" of trade contributes to a society's productive capacity.

15. Highways are the mechanisms that coordinate the exchange of surplus. Without highways people would not physically be able to trade.

Describe the coordination system in a traditional society. Identify the strengths and weaknesses of such a system.

16. The coordination system creates predictable pattern that have evolved and clearly been established overtime. Some weaknesses are that within the coordination system, there is no creativity.

Identify the signal on which the entire market system depends.

16. The price. The market is a price signaling based system.

Describe the coordination system in a command economy. Identify the strengths and weaknesses of such a system.

17. A command economy determines how resources are allocated. A command economy allows for things to be well coordinated, but it is inefficient because one person cannot know the desires of others, not fair, and there is no variety.

Explain the following statement: The market system is a price signaling based system

17. People are responding to the price, the price will signal individual intentions.

Identify the role of markets in a "liberal" society.

18. Liberal meaning free. In a free market, people are free to make their own choices. The efficiency of the market ensures that people get the most utility out of the resources they own and bring to the market. The market is also creative because it has to evolve to changing conditions.

Describe an administered price system. Give an example. Explain the problem with such a system.

18. There is no price signal adjustment to an excess supply or an excess demand, so there is not market response. The soviet union dictated most prices, which created a lot of waste.

Explain the concept of commutative justice, and describe the relationship between commutative justice and sustainability in a liberal, free market society.

19. Commutative justice is defining and enforcing our common rights and responsibilities as citizens in a liberal society, so that the conditions in the race for wealth and the conditions surrounding that race are fair. This leads to a more sustainable market because it creates a strong foundation.

Define barter. Explain the problem with a barter system by using examples.

2. Bartering is the exchange of commodities. Bartering requires matching.

Identify the two primary sets of players in our basic model of a complex society. Specify the role of each. Specify the objective of each. Using a circular flow diagram describe and explain the interaction between the two sets of players (show where they interact, what each brings to the interaction, etc.).

2. There are individuals who are people that make the choices and there are firms who are owned by individuals and produce the products.

Identify the features of a liberal society under ideal conditions that make it such an attractive system.

20. Everyone treats each other fairly and follows commutative justice.

Describe the morality of markets with respect to distributive justice.

21. People are self-interested and are looking to become wealthy, which could result in people treating others unfairly.

Describe the relationship between a free market system and justice. Explain.

22. Justice is a quality of being fair and in a free market, people have the ability to treat each other fairly or not.

Explain the concept: distributive justice. Describe John Stuart Mill's conception of what this concept means in a liberal society.

23. Socially just allocation of liberties and goods, everyone starts off with the same.

Explain the concept: commutative justice.

24. Communitive justice is everyone has an equal chance of winning; fundamental fairness.

Explain the concept: division of labor.

3. Division of labor is focusing on a particular task, or in other words, specialization. Division of labor allows for people to be more productive and inventive because they are doing the same thing over and over again.

Define general equivalent. Explain why barter gives way to the use of a general equivalent as trade expands and becomes more complex. Identify the good that has been accepted most widely and for the longest time as a general equivalent.

3. General equivalent is one particular commodity that is generally accepted in barter for any other commodity. For example, gold.

Describe the role of firms in the market system.

3. The firms buy the factors, the firms are the suppliers.

Identify what the supply line in a market picture represents.

3. The supply line represents the attitude of the suppliers

Identify three roles of money. Explain each.

4. A medium of exchange because others accepted gold for any other good or service. A unit of account because it allows people to place a value on their holdings. A store of value because people can hold a form of value in gold.

Identify what the demand line in a market picture represents.

4. The demand line represents the attitude of the demanders.

Identify the two basic kinds of markets. Distinguish these two kinds of markets by describing and contrasting how the market players participate in each.

4. There are factor markets and product markets. In a factor market. The individuals are the suppliers and the firms are the demanders. In a product market the firms are the suppliers and the individuals are the demanders.

Identify and explain the three reasons Adam Smith cites for the increased productivity from the division of labor.

4. When a person focuses on a particular task, they get better at it. Doing on task at a time saves time as opposed to doing multiple tasks. Third, when a person gets to know something very well, they become inventive.

Identify a potential problem that the division of labor can generate. Explain with an example.

5. Division of labor generates interdependence and it also creates a surplus. If I can make ten brownies and two cookies in one hour, and my friend can make three brownies and 11 cookies in one hour. I have a comparative advantage in making brownies and she has a comparative advantage in making cookies. Therefore, we decide to make what we are better at, but then that leads us to having an excess amount of one thing even though we want both.

Identify four characteristics of a general equivalent that would make it a good candidate for money. Explain each.

5. Fairly fixed to the value so it does not fluctuate. Portable because a person has to be able to carry it in order to use it as a medium of exchange. Divisible because it allows a person to break up the money in order to buy more or less of a good. Easy to store because you do not want your money to lose value.

Describe what functional form represents. Give an example.

5. Functional form is a way of describing a casual relationship between two variables. For example, a person's grade is dependent on how much effort they put in.

Define commodity money and fiat money. Contrast these two kinds of money. Give examples of each.

6. Commodity money is money that can be used as money, but also as jewelry (gold). Fiat money is money that has no inherent commodity value, it is just valuable because the government tells us so.

Explain what demand, D, represents. Distinguish between demand and quantity demanded. Critique the following statement: Along a given demand line, demand changes.

6. Demand is a function, it reflects the attitude of demanders and is represented by the demand schedule or demand line. Quantity demanded refers to a specific number.

As Adam Smith does, choose an article of clothes you are wearing and make a list of all of the hands that went into producing that article. Be thorough, be imaginative, and be logical in your ordering

6. The people that collected the cotton, the people that produced it, the people that sewed it together, the people that dyed it, the people that put tags on it, the people that packaged it, and then the people that sold it.

Define surplus. Explain why the division of labor gives rise to individuals holding surpluses.

7. A surplus is when a person has much more than what he or she needs. Division of labor means specializing to making what one is best at, which causes people to have a lot of what they are good at making, but none of the other things they need.

Explain why the division of labor gives rise to exchange.

8. Division of labor creates exchange because since there is a surplus, we have to exchange with others in order to get what we need.

Identify what the vertical line within a functional form stands for

8. Vertical line stands for given.

Explain what supply, S, represents. Distinguish between supply and quantity supplied. Critique the following statement: Along a given supply line, supply changes.

9. Supply refers to an attitude represented by the whole supply line. Quantity supplied refers to a specific number.