Econ Chapter 2

The ability of an individual, firm, or country to produce more of a good or service than competitors, using the same amount of resources.

Absolute advantage.

A model that illustrates how participants in markets are linked.

Circular-flow diagram.

The ability of an individual, firm, or country to produce a good or service at a lower opportunity cost than competitors.

Comparative advantage.

The ability of the economy to produce increasing quantities of goods and services.

Economic growth.

Someone who operates a business, bringing together the factors of production - labor, capital, and natural resources - to produce goods and services.

Entrepreneur.

Markets for the factors of production, such as labor, capital, natural resources, and entrepreneurial ability.

Factor markets.

The inputs used to make goods and services.

Factors of production.

A market with few government restrictions on how a good or service can be produced or sold or how a factor of production can be employed.

Free market.

A group of buyers and sellers of a good or service and the institution or arrangement by which they come together to trade.

Market.

The highest-valued alternative that must be given up to engage in an activity.

Opportunity cost.

Markets for goods - such as computers - and services - such as medical treatment.

Product markets.

A curve showing the maximum attainable combinations of two products that may be produced with available resources and current technology.

Production possibilities frontier (PPF).

The rights individuals or firms have to the exclusive use of their property, including the right to buy or sell it.

Property rights.

According to Adam Smith, which of the following is the instrument the invisible hand uses to direct economic activity? a. Price b. Government regulation c. Financial markets d. Cost

a. Price

The principle of increasing marginal opportunity cost states that the more resources devoted to any activity, the __________ the payoff to devoting additional resources to that activity. a. smaller b. greater c. proportional d. more instant

a. smaller

A production possibilities frontier will be linear instead of bowed out if a. the tradeoff between the two goods is always constant. b. no tradeoffs exist. c. unemployment is zero. d. resources are employed efficiently.

a. the tradeoff between the two goods is always constant.

If a market system functions well, which of the following is necessary for the enforcement of contracts and property rights? a. Powerful political connections b. An independent court system c. Action by government to prevent the exercise of certain property rights

b. An independent court system

In a free market system, which of the following groups brings together the factors of production— labor, capital, and natural resources—in order to produce goods and services? a. The government b. Entrepreneurs c. Lobbyists d. Politicians

b. Entrepreneurs

Fill in the blanks. In a simple circular flow model, there are flows of _________ and flows of _________. a. factors of production; goods and services b. funds received from the sale of factors of production; spending on final goods and services c. Both of the above are correct. d. None of the above. Actually, there are no flows in the circular flow of income.

c. Both of the above are correct.

According to Adam Smith, which of the following is necessary for the proper functioning of the market system? a. For markets to work, people should take into account how their decisions affect society as a whole. b. For markets to work, government should help citizens make the right decisions. c. For markets to work, people must be free to pursue their self-interest. d. For markets to work, people and government need to coordinate their decisions.

c. For markets to work, people must be free to pursue their self-interest.

Which of the following comprises the two key groups of participants in the circular flow of income? a. Product markets and factor markets b. Government and the financial sector c. Households and firms d. Buyers and sellers

c. Households and firms

In which markets are factors of production, such as labor, capital, natural resources, and entrepreneurial ability traded? a. In product markets b. In essential markets c. In factor markets d. In competitive markets

c. In factor markets

According to Adam Smith, which of the following is true? a. Markets work because producers, aided by government, ensure that neither too many nor too few goods are produced. b. Market prices can come to reflect the prices desired by all consumers. c. Individuals usually act in a rational, self-interested way. d. All of the above.

c. Individuals usually act in a rational, self-interested way.

What is the role of an entrepreneur? a. To operate a business that produces a good or service. b. To bring together the factors of production—labor, capital, and natural resources. c. To take risks. d. All of the above

d. All of the above

Which of the following would create economic growth, that is, shift the production possibilities frontier outward? a. An increase in the available labor. b. An increase in technology that affects the production of both goods. c. An increase in the available natural resources. d. All of the above

d. All of the above

What is the outcome of enforcing contracts and property rights in a market system? a. Increased economic activity b. Decreased economic activity c. No change or no effect on economic activity d. An unpredictable but definite effect on economic activity

a. Increased economic activity

Which of the following refers to markets where goods such as computers or services such as medical treatment are offered? a. Product markets b. Essential markets c. Factor markets d. Competitive markets

a. Product markets

According to textbook section 2.2 on trade, which of the following statements is most consistent with positive economic analysis? a. The United States would be better off being self-sufficient, so we don't have to rely on other nations for certain goods. b. The United States would be better off if we specialize in the production of some goods, and then trade some of them to other countries. c. We should produce at home the goods that we now import—that way we can generate additional jobs here at home. d. We should establish trade with friendly countries and avoid trade with our enemies.

b. The United States would be better off if we specialize in the production of some goods, and then trade some of them to other countries.

Generally speaking, for a market system to work, individuals must a. be very cautious in their approach to saving and investment. b. take risks and act in rational, self-interested ways. c. be able to evaluate and understand all available options. d. consult people who have experience.

b. take risks and act in rational, self-interested ways.

What are patents and copyrights designed to do? a. Prevent entrepreneurs from earning excessive profits. b. Eliminate unnecessary duplication whenever it arises. c. Protect intellectual property rights. d. All of the above

c. Protect intellectual property rights

What happens if a country produces a combination of goods that uses all of the resources available in the economy? a. The country is operating on its production possibilities frontier. b. The country is maximizing its opportunity cost. c. The country has eliminated scarcity. d. All of the above

a. The country is operating on its production possibilities frontier.

Which of the following is critical for the success of a market system? a. To allow individuals or firms to have exclusive use of their property. b. To prevent individuals from buying or selling their property depending on the circumstances. c. Either choice above. d. To allow the government to determine the optimal use of private property.

a. To allow individuals or firms to have exclusive use of their property.

Absolute advantage is the ability of an individual, firm, or country to a. produce more of a good or service than competitors using the same amount of resources. b. produce a good or service at a lower opportunity cost than other producers. c. consume more goods or services than others at lower costs. d. reach a higher production possibilities frontier by lowering opportunity costs.

a. produce more of a good or service than competitors using the same amount of resources.

If a country has a comparative advantage in the production of a good, then that country a. also has an absolute advantage in producing that good. b. should allow another country to specialize in the production of that good. c. has a lower opportunity cost in the production of that good. d. All of the above

c. has a lower opportunity cost in the production of that good.