Chapter 2 Review Questions

market

An institution that brings buyers and sellers together

Ted and Fred are owners of a gas station. They invested $150,000 each and pay an employee named Lawrence $35,000 per year. This year's revenues are $900,000, while costs are $940,000. Who is legally responsible for bearing the $40,000 loss?

Ted and Fred

freedom of enterprise

The freedom of firms to obtain economic resources, decide what products to produce with those resources, and sell those products in markets of their choice

freedom of choice

The freedom of resource owners to dispose of their resources as they think best; of workers to enter any line of work for which they are qualified; and of consumers to spend their incomes in whatever way they feel is most appropriate

competition

The presence in a market of independent buyers and sellers who compete with one another and who are free to enter and exit the market as they each see fit

private property

The right of private persons and firms to obtain, control, employ, dispose of, and bequeath land, capital, and other property

self interest

What each individual or firm believes is best for itself and seeks to obtain

Command system, market system, or laissez faire system? A woman who wants to start a flower shop finds she cannot do so unless the central government has already decided to allow a flower shop in her area

command system

"Each day, central planners in thed Soviet Union were tasked with setting 27 million prices-correctly."

coordination problem

True or false: households sell finished products to businesses

false

"Managers in the old Soviet Union often sacrificed product quality and variety because they were being awarded bonuses for quantitative, not qualitative, targets."

incentive problem

"It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner, but from their regard to their own interest."

invisible hand

Command system, market system, or laissez faire system? Shops stock and sell the goods their costumers want, but the government levies a sales tax on each transaction in order to fund elementary schools, public libraries, and welfare programs for the poor.

market system

friends have decided to pool their financial resources and business skills to open and run a new coffee shop. They will share any profits or losses that the business generates and will be personally responsible for making good on any debt that their business undertakes. Their business is a:

partnership

"If you compare a list of today's most powerful and profitable companies with a similar list from 30 years ago, you will see lots new entries."

Creative destruction

mutually agreeable

Economic transactions willingly undertaken by both the buyer and the seller because each feels that the transaction will make him or her better off

True or False: Money must be issued by a government for people to accept it.

False

Command system, market system, or laissez faire system? The only taxes levied by the government are to pay for national defense, law enforcement, and a legal system designed to enforce contracts between private citizens.

Laissez faire system