The Market System and the Circular Flow

An economic system intends to address _______ goods and services are to be produced, ________ they are to be produced, _______ gets what is produced, how to accommodate change and how to promote technological progress.

what; how; who

Which of the following is characterized by the private ownership of resources and the use of markets to coordinate and direct economic activity. ∙ An economic system ∙ A market system ∙ A democratic system ∙ A command system

∙ A market system

Which of the following describe the virtues of incentives? ∙ Assumption of risk by entrepreneurs ti innovate and improve the general standard of living. ∙ Hard work, skill acquisition, and innovation ∙ Assumption of risk by entrepreneurs leading to substantial losses. ∙ Greater work skills and effort mean greater production and higher incomes leading to higher standards of living.

∙ Assumption of risk by entrepreneurs ti innovate and improve the general standard of living. ∙ Hard work, skill acquisition, and innovation ∙ Greater work skills and effort mean greater production and higher incomes leading to higher standards of living.

Which of the following would be an example of the system accommodating change? ∙ Buyers want equal amounts of juice and milk. Producers increase spending on juice and milk. Profits rise in the juice and milk industry. ∙ Buyers want more juice and less milk. Producers increase spending only on juice. Profits rise in the juice industry and fall in the milk industry.

∙ Buyers want more juice and less milk. Producers increase spending only on juice. Profits rise in the juice industry and fall in the milk industry.

Which of the following best describe how goods and services will be produces? ∙ By utilizing the right mix of labor and capital ∙ Though the maximization-cost production method ∙ By locating production facilities optimally to hold down production and transportation expenses ∙ By utilizing a level of labor equal to the level of capital available to a firm

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

Which of these countries or areas have/had an economy that exemplified a movement from a pure command economy to a market-oriented economy? ∙ Cuba ∙ China ∙ The former Soviet Union ∙ North Korea

∙ China ∙ The former Soviet Union

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

2

What type of society needs to develop an economic system?

A society with limited resources.

_____________ is the human specialization of some process.

Division of labor

True or false: Freedom of enterprise enables owners to produce the goods and services of their choice and sell them to only those markets directed by the government.

False

True or false: Money complicates exchange or trade.

False

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

False

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

Free market system

Who owns most property resources in a command system?

Government

According to the index Economic Freedom, three economies ranked as "free" are?

Hong Kong, Australia, Switzerland

Freedom of _________ enables owners to employ or dispose of their property and money as they see fit.

choice

A central planning board sets the division of output between capital and consumer goods in a ____________ system?

command

The market system depends on _________ among buyers and sellers.

competition

Private property rights, coupled with the freedom to negotiate binding legal _____________ enables individuals and businesses to obtain, use, and dispose of property resources as they see fit.

contracts

The command economies of the former Soviet Union, Eastern Europe, and China prior to market reforms failed due to ___________ and ___________ problems.

coordination; incentive

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

Division of labor that works on a regional or intermediate basis is known as __________ specialization.

geographical

In a market system, private property refers to the right of private firms and individuals, not the _______________ to own most property resources such as land and capital.

government

The two parties involved in the circular flow model are?

households and businesses

The ________ describes a situation faced in command economics in which producers have no reason to adjust production in response to shortages and surpluses in the economy.

incentive problem

Pure capitalism is also known as _________ capitalism.

laissez-faire

Through ______________ production, firms must employ the the most economically efficient technique of production in producing their output.

least-cost

Just as a producer that charges more than the competitive price will relinquish sales to other producers, so will an employer who pays less than the competitive wage rate will:

lose workers to other employers

A ___________ (one word) is an institutional or mechanism that brings buyers and seller into contact.

market

Competition is a key feature of the _________ economic system.

market

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

market

In a ___________ system, people act in their own-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

According to the textbook, the countries ranked as repressed include:

Iran, Argentina, North Korea

_________ property helps to facilitate exchange in a free market system.

Private

_________, as well as technology increases the total output society derives from _________ resources.

Specialization; scarce

True or false: A person's income depends on the quantities of property and human resources that the person supplies to the market.

True

True or false: Communism exhibits all the characteristics of a command system.

True

True or false: Ina a command system, the government decides how a country's resources will best be utilized.

True

True or false: Technology and capital goods are synonymous concepts in a market system.

True

True or false: The lack of incentives contributed to the economic problems faced by the economies of the former Soviet Union, Eastern Europe , and China prior to market reforms.

True

True or false: The sale of farm equipment can take place both in the resource market and the product market.

True

The name of the 11776 book authored by Adam Smith noting that the operation of a market economy creates unity between private and social interests is called:

Wealth of Nations

Barter poses serious problems because it requires:

a coincidence of wants

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

a market system

Entrepreneurs trying to maximize profits and minimize losses, property owners trying to get the highest price for the sale or rental of their resources, and workers trying to maximize their satisfaction by finding jobs that offer the best combination of wages, hours, benefits, and working conditions are all examples of?

acting in one's self-interest

Every society needs to develop _________________ to respond to the economizing problem.

an economic system

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.

Competition among _______ and _________ diffuses economic power within the economic units that make up the economy.

buyers; sellers

Selling human organs or buying illicit drugs are punished through fines and imprisonment. This exemplifies the concept that freedom of enterprise and choice are limited:

by laws preventing the production of specific goods and services

The most important consequence of property rights is that they:

encourage cooperation by that only mutually agreeable economic transactions take place

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

In addition to lacking incentives, the command economies of the former Soviet Union, Eastern Europe, and China prior to market reforms also lacked ___________.

entrepreneurship

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

firms

In a circular flow model, households sell resources to, and buy products from ________.

firms

Under the market system, __________ and _________ coordinate and direct economic activity.

market; prices

The millions of decisions made by households and businesses are highly coordinated with one another by ____________ and ____________.

markets; prices

In a market system, ____________ create powerful incentives for firms to innovate and entrepreneurs to pioneer new products and processes.

monetary rewards

The use of ____________ in market systems facilitates the exchange of goods and services that specialization requires.

money

The various forms of intellectual property rights discussed in McConnell include _________, _________ and ___________.

patents; trademarks; copyrights

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

private property rights

Specialization is about an individual or firm using available resources to:

produce one or only few goods and services

According to the circular flow model, households buy goods and services that businesses make available in the _________ market.

product

The price of a new 32 inch HDTV would be determined in the:

product market

Technological improvements or advancements also include new improved methods that _____________ distribution or production costs.

reduce

Competition is the __________ mechanism of the market system, whereas the market system itself is the organizing and _________ mechanism.

regulatory; coordinating

Households obtain income in the ____________ market in order to buy the goods and services that businesses produce in the _____________ market.

resource; product

The five questions that every society must address reflect the reality of _________ resources in a world of __________ wants.

scarce; unlimited

The five questions that every society must address reflect the reality of __________ resources in a world of __________ wants.

scarce; unlimited

In order to serve a money, an item must be generally accepted to _____________ in exchange for their goods and services.

sellers

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

sole

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

specialization

Production and resource prices in a market system are determined by:

the interaction between buyers and sellers

Ina market economy, goods and services are distributed:

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

Competition in a market economy requires _________ or more buyers and sellers.

two

Which of the following describes how the market system will promote progress? ∙ Competitive markets create incentives for technological advance and capital accumulation, both of which contribute to promoting progress. ∙ Competitive markets create incentives for equality, which contributes to promoting progress. ∙ Competitive markets discourage creative destruction, which contributes to promoting progress. ∙ Competitive markets create incentives for subsidies, which contribute to promoting progress.

∙ Competitive markets create incentives for technological advance and capital accumulation, both of which contribute to promoting progress.

______________ collectively direct or directs resources to industries that are meeting consumer wants and away from industries that are not meeting consumer wants.

∙ Consumer sovereignty ∙Dollar votes

Which of the following effects does competition among buyers and sellers have? ∙ Enables a single buyer or seller to dictate price. ∙ Diffuses economic power within businesses and households comprising the economy. ∙ Eliminates the ability of buyers and sellers to undercut the price of a single rogue buyer or seller. ∙ Consolidates economic power within those buyers and sellers who are most efficient.

∙ Diffuses economic power within businesses and households comprising the economy.

Which of the following best illustrates exchange through barter? ∙ Farmer John trades his coin for some of his neighbors oranges. ∙ The daily exchange of stocks and bonds on the New York Stock Exchange. ∙The purchase of 100 acres of farmland for $2 million dollars.

∙ Farmer John trades his coin for some of his neighbors oranges.

Identify the three virtues of the market system. ∙ Freedom ∙ Exuberance ∙ Greed ∙ Incentives ∙ Efficiency

∙ Freedom ∙ Incentives ∙ Efficiency

Which of the following is/are found in the product market? ∙ Land ∙ Entrepreneurial ability ∙ Labor ∙ Capital ∙ Goods and services

∙ Goods and services

All economies, whether market or command, must address which of the following questions? ∙ How will the system accommodate change? ∙ How will a central planning authority operate? ∙ How will the goods and services be produced? ∙ Who will get the goods and services? ∙ What goods and services will be produced? ∙ How will the system promote progress?

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

Over the years, many people have benefited from technological innovations and advancements such as the personal computer and medical discoveries. This illustrates which of the following concepts? ∙ Efficiency ∙ Invisible hand ∙ Incentives ∙ Greed

∙ Invisible hand

Geologist working for ExxonMobil have determined that there exists a high probability that your neighborhood is located above a potentially large oil reserve. As a result, ExxonMobil offers a purchase to every owner's property as a substantial price to which everyone agrees. Which of the following does this illustrate? ∙ independent economic transaction ∙ Mutually agreeable economic transaction ∙ Mutually exclusive economic transaction ∙ Public domain

∙ Mutually agreeable economic transaction

Which of the following best illustrates a coincidence of wants? ∙ Nebraska has wheat to trade and wants oranges. Florida has oranges and wants tequila. Therefore, an exchange between Florida and Mexico occurs. ∙ Nebraska has excess wheat to trade and wants oranges. Florida has excess oranges and wants corn. Therefore, an exchange occurs. ∙ Nebraska has excess wheat to trade and wants oranges. Florida has excess oranges and wants wheat. Therefore, an exchange occurs. ∙ Florida has excess oranges and wants wheat from Nebraska. Therefore. an exchange between Nebraska and Florida occurs.

∙ Nebraska has excess wheat to trade and wants oranges. Florida has excess oranges and wants wheat. Therefore, an exchange occurs.

Describe the role of a central planning board appointed by a command system government.

∙ Organizes production ∙ Makes decisions on the composition and distribution of output. ∙ Makes all decisions concerning the use of resources.

In order to cope with the difficulties in coordinating the production of goods and services, central planners in the former Soviet Union took which of the following actions? ∙ Enhanced product variety ∙ Removed bonus pay from workers ∙ Offered bonus pay to workers ∙ Suppressed product variety

∙ Suppressed product variety

Which of the following describes how a market system decides what will be produced? ∙ The goods and services produced at a continuing loss will be produced, and those produced at a continuing profit will not. ∙ The goods and services produced at a continuing profit will be produced, and those produced at a continuing loss will not. ∙ The goods and services will be produced in combination and ways that maximize the cost per unit of output. ∙ The goods and services determined by the government will be produced, and those requested by households will not.

∙ The goods and services produced at a continuing profit will be produced, and those produced at a continuing loss will not.

Which of the following helps sustain the institution of private property? ∙ The Land Proclamation of 1870 ∙ The freedom of enterprise ∙ The right of property owners to designate who will receive their property when they die ∙ The right of the government to designate who will receive property when land owners die

∙ The right of property owners to designate who will receive their property when they die

Which of the following best exemplifies a noncoincidence of wants? ∙ Tom wants cherries from Jack. Jack wants Mary's oranges but not Tom's apples. Mary wants some of Tom's apples but not Jack's cherries. ∙ Tom wants cherries from Jack and oranges from Mary. Jack wants Mary's oranges and Tom's apples. Mary wants some of Tom's apples and Jack's cherries.

∙ Tom wants cherries from Jack. Jack wants Mary's oranges but not Tom's apples. Mary wants some of Tom's apples but not Jack's cherries.

Which of the following does competition require? ∙ Two or more buyers and two or more sellers acting independently in a particular market. ∙Freedom of sellers and buyers to enter or leave markets. ∙Two or more buyers and two or more sellers acting dependently in a particular market. ∙Manually exclusive economic transactions

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

Which of the following is a more desirable method of production? ∙ Exclusive use of labor, only when capital and technology exceed the cost of labor. ∙ Exclusive use of capital, only when labor exceeds the cost of capital. ∙ Exclusive use of technology as it is often changing and results in continuous creative destruction. ∙ Using a combination of labor, capital and technology

∙ Using a combination of labor, capital and technology

The command economies of the former Soviet Union and Eastern Europe failed due to:

∙ incentive problems ∙coordination problems

Capital accumulation refers to the accumulation of:

∙ physical capital goods that are required to advance technology. ∙ physical capital goods that yield even greater profit income in the future. ∙ physical capital goods that are used to build consumer goods.

Which of the following have historically been used as a medium of exchange? ∙ human organs ∙ stones ∙ cattle ∙ metals ∙ shells ∙ cigarettes

∙ stones ∙ cattle ∙ metals ∙ shells ∙ cigarettes

Advanced technology and capital goods are important because

∙ the most productive methods are often the most efficient ∙ the most direct methods of producing a good or service are often the least efficient

Which of the following are examples of capital goods? ∙ tools ∙ MP3 players (e.g. iPods) ∙ machinery ∙ large-scale factories ∙ recreational bicycles

∙ tools ∙ machinery ∙ large-scale factories

By moving up the hierarchy of the Communist party, individuals could obtain which of the following? ∙Better access to health care ∙Better housing ∙The right to shop in special stores ∙A higher standard of living for the entire command economy

∙Better access to health care ∙Better housing ∙The right to shop in special stores

Which of the following best serves as the regulatory mechanism of the market system? ∙Capital ∙Property rights ∙The Government ∙Interests rates ∙Competition

∙Competition

Freedom of entry and exit of producers enables the economy to adjust to changes in which of the following areas? ∙Consumer tastes ∙Technology ∙Resource availability ∙Wages ∙Savings

∙Consumer tastes ∙Technology ∙Resource availability

Which of the following is inherent in competition and limits the potential abuse of power? ∙Diffusion of economic power ∙Law of one price ∙Standardization ∙The invisible hand of the market

∙Diffusion of economic power

Which of the following enables owners to employ or dispose of their property and money as they see fit? ∙Freedom of enterprise ∙Freedom of property disposal ∙Freedom of choice ∙Freedom of creativity

∙Freedom of choice

Which of the following describes the role of government in the United States' form of capitalism? ∙A laissez-faire or "hands-off" approach to the market. ∙Promotes economic stability and growth. ∙Provides certain goods and services that would otherwise be under-produced or not produced at all. ∙Provides the rules for economic activity. ∙Modifies the distribution of income.

∙Promotes economic stability and growth. ∙Provides certain goods and services that would otherwise be under-produced or not produced at all. ∙Provides the rules for economic activity. ∙Modifies the distribution of income.

Which of the following best describes the virtue of efficiency? ∙The market system allocates resources equally on order to produce goods and services. ∙The market encourages the development and adoption of new and more efficient production techniques. ∙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. ∙The market system promotes the efficient use of resources by guiding them into the production of the goods and services most wanted by society.

In which country is laissez-faire capitalism most likely to be practiced. ∙United States ∙North Korea ∙Cuba ∙Libya

∙United States

Which of the following provide the opportunity and motivation for technological advance? ∙competition ∙personal reward ∙freedom of choice ∙self-interest ∙corporate taxes

∙competition ∙personal reward ∙freedom of choice ∙self-interest

Which of the following are components of the circular flow model? ∙component market ∙households ∙product market ∙businesses ∙resource market

∙households ∙product market ∙businesses ∙resource market

Monies that flow out of businesses to pay for resources are costs to businesses, but they represent which of the following types of flows to households? ∙interest ∙rent ∙profit income ∙wages ∙goods and services

∙interest ∙rent ∙profit income ∙wages

Property rights encourage:

∙investment ∙economic growth ∙property maintenance ∙innovation ∙exchange

Intellectual property is an extension of property rights through:

∙patents ∙copyrights ∙trademarks

The three main categories into which businesses fall are:

∙sole proprietorship ∙corporation ∙partnership