Chapter 2 Economics Review

Where in the circular flow model does a paycheck belong?

Factor market, monetary flow

What is an argument that some analysts use to criticize government regulation?

It results in inefficiency

Adam Smith

Scottish economist who wrote the Wealth of Nations a precursor to modern Capitalism.

Where in the circular flow model does a new car on display in an auto dealer's showroom belong?

Product market, physical flow

Which of the following is an explanation of what Adam Smith called the "Invisible Hand" of the marketplace?

Self-interest, Competition, and incentives promote smoothly running markets

standard of living

Quality of life based on ownership of necessities and luxuries that make life easier

market

a group of buyers and sellers of a particular good or service

economic transition

a period of change in which a nation moves from one economic system to another

communism

a political theory derived from Karl Marx, advocating class war and leading to a society in which all property is publicly owned and each person works and is paid according to their abilities and needs.

incentive

a positive or negative environmental stimulus that motivates behavior

Authoritarian Government

a system of rule in which the government recognizes no formal limits but may nevertheless be restrained by the power of other social institutions

free market economy

an economic system in which decisions on the three key economic questions are based on voluntary exchange in markets

centrally planned economy

an economy in which the government decides how economic resources will be allocated

Which of the following is an example of a positive externality resulting from an outdoor band concert?

an elderly woman in her apartment hears a song that she liked as a child

firm

an organization that uses resources to produce a product, which it then sells

In a free market system, the concept of consumer sovereignty means that

consumers have the power to decide through their actions what goods and services get produced

Which is an example of why the U.S government makes transfer payments?

to support retired people

Public goods are examples of market failure, because producing these goods in the free market

does not allow for the efficient distribution of resources

Market failure occurs whenever

free markets fail to distribute resources efficiently

Distinguish which economic goal reflects the desire of individuals to make their own choices about owning property or becoming entrepreneurs?

freedom

Which policy change was partly responsible for economic growth in China starting in the 1970s?

giving farmers the chance to own land

Who makes most basic decisions in a centrally planned economy

government

Which of the following is typical of a centrally planned economy?

government control

safety net

government programs that protect people experiencing unfavorable economic conditions

Government involvement in a modern economy is generally defended because

governments are more able than firms to meet some needs and wants of society

What might be the economic benefit of the government providing a public good rather than the private sector?

greater efficiency in providing the good

Which of the following describes the benefits of specialization in a free market?

specialization leads to efficient use of capital, land, and labor

How do self-interest and competition affect free markets?

they work together to regulate supply, demand, and prices

Why do markets exist?

to allow people to exchange goods and services

Government-built infrastructure is a public good. Which of the following BEST paraphrases the intent of this press release by a government official?

to persuade people that the benefits of repairing infrastructure outweigh the costs

Privitization

when the government sells its industries to individuals or private companies

What is critical in determining whether something is produced as a public good?

whether the benefits to society are greater than the total cost

The distribution of income received in the form of rent, wages, or interest is the main factor that determines

who consumes goods and services

What basic economic question deals with the issue of where a person can afford to live?

who consumes the goods and services that are produced

What is one reason centrally planned economies tend not to be efficient

workers lack the incentive to work harder

intellectual property

A product of the intellect, such as an expressed idea or concept, that has commercial value.

socialism

A system in which society, usually in the form of the government, owns and controls the means of production.

command economy

An economic system in which the government controls a country's economy.

Traditional Economy

An economy in which production is based on customs and traditions and economic roles are typically passed down from one generation to the next.

innovation

An improvement of an existing technological product, system, or method of doing something.

How did communist China manage to survive when the Soviet Union did not?

China introduced capitalist reforms

Laissez-faire

Idea that government should play as small a role as possible in economic affairs.

What role does competition among producers play in a free market?

It causes firms to produce what consumers want while moderating prices

What is one way in which the economy of Singapore varies from the economy of Iran?

Singapore's government is less involved in the nation's economy than Iran's government is

Which of the following represents a difference between socialism and communism?

Socialism may allow some free market practices; communism does not

mixed economies

Systems in which the economies incorporate all three traditional, command ans market economies

self-interest

That which each firm, property owner, worker, and consumer believes is best for itself and seeks to obtain.

profit

The financial gain made in a transaction

Which of the following BEST identifies how three basic economic questions are answered in the United States?

Through the combined effect of the decisions of individuals in the marketplace

According to the circular flow of a market economy, firms buy factors of production from households, then

Use these factors to produce goods and services

What are the three basic economic questions all societies must answer?

What goods and services should be produced, how should they be produced, and who will consume them?

Governments have often become involved in market-based economies in order to

address various limits of the free market system

Why does a free market economy result in the availability of a wide variety of goods and services?

because producers have incentives to meet consumers' desires for variety

How does innovation promote economic growth?

by introducing new goods and services that create new markets

How were the Soviet Union and communist China similar?

both suffered from severe economic problems as a result of central planning

How is a society's economic system defined?

by how it answers the three basic economic questions

A government hiring freeze would directly impact what aspect of the circular flow model of a mixed economy?

factor market

Key advantages of free market economic systems include

economic efficiency, economic freedom, economic growth, and variety of goods

An economy that maximizes its scarce resources and can deliver the right goods in the right quantity to the right people at the right price has achieved which economic goal?

efficiency

Which basic economic goal is most easily achieved in a traditional economy?

equity

What is one reason that local law enforcement is considered a public good?

everyone in the community benefits from it

China's economy is considered more mixed than North Korea's because China

has freer markets

What distinguishes an authoritarian government from a democratic one

it requires strict obedience from its citizens

What is a disadvantage of central planning?

lack of economic efficiency

factor market

market in which firms purchase the factors of production from households

Private property ownership and some government regulation of the economy are basic characteristics of which economic system?

mixed economy

Which of the following explains why a city fireworks display in the Fourth of July is provided as a public good?

nonpayers cannot be prevented from seeing the fireworks

Police protection and national defense are examples of what government role in the circular flow model?

producing goods and services from factors purchased in the factor market

private property

property owned by individuals or companies, not by the government or the people as a whole

The goal of government welfare programs is to

raise the standard of living of certain less-fortunate members of society

What did Karl Marx believe about capitalism

that it led to exploitation of workers

households

the consuming units in an economy

Specialization

the development of skills in a specific kind of work

factor payment

the income people receive in return for supplying factors of production

product market

the market in which households purchase the goods and services that firms produce

economic system

the method used by a society to produce and distribute goods and services

consumer sovereignty

the power of consumers to decide what gets produced

competition

the struggle among producers for the dollars of consumers

If a student volunteers at a food pantry on Fridays after school, which of the following might be a negative externality?

the student's parents have to drive him or her to the food pantry

Which of these is an example of restrictions that government places on the use of business property?

zoning laws