Economics Test 2

laissez-faire capitalism

"pure capitalism"—the government's role would be limited to protecting private property from theft and aggression and establishing a legal environment in which contracts would be enforced and people could interact in markets to buy and sell goods, services, and resources.

Corporation

*mentioned previously

Partnership

*mentioned previously

Sole Proprietorship

*mentioned previously

A market system decides what to produce based on which of the following?

-Continued economic profit from producing a good or service -The movement of resources toward an industry that exhibits continued profits from producing a good or service

Market 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

What occurs in the resource market?

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

What functions can a corporation do on its own behalf?

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

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

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

3 virtues of the market system

1. Efficiency 2. Incentives 3. Freedom

Competition is the A.______ mechanism of the market system, whereas the system of prices and markets is the organizing and B.______ mechanism.

A.regulatory B.coordinating

Virtue of the market system: freedom means

Allowing business owners and entrepreneur to be innovative

What are the effects does competition have among buyers and sellers?

It diffuses economic power within businesses and households comprising the economy.

What are the resources businesses purchase from households?

Land, Entrepreneurial ability, Labor, Capital

Virtue of the market system: incentives means

Motivated workers will work more efficiently in product production

What roles does the government play in the type of capitalism practiced in the United States?

The government... -provides the rules for economic activity. -promotes economic stability and growth. -modifies the distribution of income. -provides certain goods and services that otherwise would be under-produced or not produced at all.

How does the market system's virtue of incentives?

The market system ... -encourages skill acquisition and hard work, leading to increased production and incomes and higher standards of living. -promotes the efficient use of resources by encouraging the development and adoption of new -leaves participants free to further their own self-interest, and any rewards or penalties are imposed by the market system itself.

What follows 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 development and adoption of new and more efficient production techniques.

Economic System

a particular set of institutional arrangements and a coordinating mechanism used to respond to the economizing problem. _______ _______s have two polar extremes: the Command System, and the Market System.

Market System

also known as Capitalism, this system is characterized by the private ownership of resources and the use of markets and prices to coordinate and direct economic activity. Participants in this system act in their own self-interest. Individuals and businesses seek to achieve their economic goals through their own decisions regarding work, consumption, or production. This system allows for private ownership of capital, communication through prices, and coordination of economic activity through markets.

Command System

also known as Socialism or Communism, in this type of economic system government owns most property resources and controls economic decision making through a central planning board. A central planning board makes nearly all the major decisions concerning the use of resources, the composition and distribution of output, and the organization of production. Due to inevitable problems in coordination and incentivizing businesses to innovate and excel, these systems tend to fail consistently.

Self-interest helps achieve society's economic goals because

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.

"invisible hand"

asserts that businesses seek to build new and improved products to increase profits. In doing so, those enhanced products increase society's well-being. For ex: computer

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

What is produced is ultimately determined by

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

the system of prices and markets is the organizing and ______ mechanism.

coordinating

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?

efficiency

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 BC A title or a deed facilitates the exchange of private property, but does not guarantee that the current owner will maintain said private property.

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

false

In the circular flow model, the market economy creates continuous flows of ...

goods and services, resources, and money

An advantage of using capital in the production process is that it

improves efficiency, increases output, and provides for growth.

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.

Self-Interest

in the market system, this is the motivating force of the various economic units as they express their free choices. ___-______ simply means that each economic unit tries to achieve its own particular goal, which usually requires delivering something of value to others.

There is such a wide variety of desired goods and services in a market system because

individual wants are diverse.

division of labor

is the human specialization of some process.

Due to the diffusion of economic power inherent in competition, an employer who pays less than the competitive wage rate will...

lose workers to other employers

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.

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

markets and prices

Goods and services are produced efficiently when production is organized in combinations and ways that _______

minimize the cost per unit of output

Medium of Exchange

most often found in the form of paper money, this is simply a conduit that facilitates trade and eliminates much of the stagnation of trade that would ensue in a system that relies on barter exchange.

The most important consequence of property rights is that they encourage cooperation by ensuring that ...

only mutually agreeable economic transactions take place

What is the coordinating mechanism in a market system?

prices businesses makes decisions based on prices

Economic growth, investment, innovation, exchange, and maintenance of property are all possible because of _______

private property rights

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.

In the goods and services portion of the circular flow model, there is a flow of...

real goods and services and a flow of money.

Competition is the ______ mechanism of the market system

regulatory

The term "division of labor" means that workers

specialize in tasks that take advantage of their individual abilities and skills.

How will the market system will promote progress? Competitive markets create incentives for ...

technological advance and capital accumulation, both of which contribute to promoting progress.

Businesses

these are commercial establishments that attempt to earn profits for their owners by offering goods and services for sale. They fall into three main categories: Sole Proprietorships (owned and managed by a single person), Partnerships (the natural outgrowth of a sole proprietorship, this is a business owned and managed by two or more people), and Corporations (independent legal entities that can--on their own behalf--acquire resources, own assets, produce and sell products, incur debts, extend credit, etc.).

Households

these are defined as one or more persons occupying a housing unit. These buy the goods and services that business make available in the product market. _________s obtain the necessary funds to purchase these products with by selling their resources in the resource market. In a no-government economic representation of the economy, all resources are ultimately owned by ________s.

Dollar Votes

these are the "votes" with which consumers dictate what is produced, how much of something is produced, and what industries grow or shrink and thrive or fail.

Freedom of Choice

this characteristic of the market system enables owners to employ or dispose of their property and money as they see fit. This also allows workers to try to enter any line of work for which they are qualified. It also ensures that consumers are free to buy the goods and services that best satisfy their wants and that their budgets allow.

Freedom of Enterprise

this characteristic of the market system ensures that entrepreneurs and private businesses are free to obtain and use economic resources to produce their choice of goods and services and to sell them in their chosen markets.

Consumer Sovereignty

this describes the control consumers have over what is produced, how much of something is produced, and what industries thrive or fail, based on their "dollar votes." Essentially, consumers control the proceedings within a market system.

Creative Destruction

this entails the creation of new products and production methods which completely destroy the market positions of firms that are wedded to existing products and older ways of doing business.

Specialization

this entails using the resources of an individual, firm, region, or nation to produce one or a few goods or services rather than the entire range of goods and services. Those goods and services are then exchanged for a full range of desired products.

Barter

this is a system of change predicated on the process of swapping goods for goods. This can exist if there is a "coincidence of wants", but, more often than not, leads to stymied trade.

Market

this is an institution or mechanism that brings buyers ("demanders") and sellers ("suppliers") into contact.

Division of Labor

this is human specialization that contributes to a society's output in several ways: it makes use of differences in ability, fosters learning by doing (by performing a single task, a person is likely to become much more proficient at that particular task), and saves time (by facilitating a more "assembly line" form of production, rather than having workers attempt to complete multiple different tasks).

Competition

this is literally the freedom of choice exercised in pursuit of monetary return. It requires two or more buyers and two or more sellers acting independently in a particular product or resource market, and freedom of sellers and buyers to enter or leave markets on the basis of their economic self-interest.

Money

this is the conduit that facilitates exchange and trade and allows buyers and sellers to bypass the obstacle that a lack of "coincidence of wants" presents. To be considered "______", an item must only be generally acceptable to sellers in exchange for their goods and services.

Circular Flow Diagram

this is the graphical representation that demonstrates the monetary flows of a simplified economy, excluding the influence of governmental factors.

Product Market

this is the place where the goods and services produced by businesses are bought and sold. Households use the income they receive from the sale of resources to buy these goods and services. The money that the households spend on goods and services flows to the businesses as revenue.

Private Property

this is the private ownership of capital that gives "Capitalism" its name. The right to own _____ ______, as well as the freedom to negotiate binding legal contracts, enables businesses and individuals to dispose of property resources as they see fit. The right of ______ _______ also encourages fair business trades and practices, as well as the desire to innovate and maintain quality (people would have no incentive to do so if property could be stolen at the will of the government).

Resource Market

this is where households sell resources to business in exchange for income that will be used to purchase consumer goods and services in the product market.

Invisible Hand

this, as described in Adam Smith's "Wealth of Nations", concerns how firms and resource suppliers, seeking to further their own self-interest and operating within the framework of a highly competitive market system, will produce goods that simultaneously promote or serve public interest. Essentially, this describes the somewhat mysterious communication that transpires between consumers and producers, which eventually results in the production of goods that are lucrative for the businesses and producers, as well as satisfying to the demanders (consumers) themselves.

A ________ facilitates the exchange of private property, but does not guarantee that the current owner will maintain said private property.

title or a deed

When an economy relies on specialization,

trade enables individuals to obtain the goods in which they do not have a specialization.

True or false: A central feature of the (pure) market system is the ability to reap monetary rewards from the innovation and creation of new products and processes.

true