ECON 102 CHAPTER 2

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What is produced is ultimately determined by

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

The phrase "invisible hand" means that

market prices provide information to consumers regarding products they wish to purchase, and to producers regarding products they wish to produce.

In a market system scarce goods are allocated through the operation of

market prices that are determined by consumers and producers acting in their own self-interest.

The use of money

provides a common value that makes buying and selling transactions simpler than would be the case with barter.

In the circular flow model there is a flow of

real goods and services and a flow of money.

True or False: Households sell finished products to businesses.

False.

Match each of the quotes with the correct term.

a. "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 of new entries:" Creative destruction b. "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 c. "Each day, central planners in the old Soviet Union were tasked with setting 27 million prices—correctly:" Coordination problem d. "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

Decide whether each of the following descriptions most closely corresponds to being part of a command system, a market system, or a laissez-faire system.

a. 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 b. Shops stock and sell the goods customers want but the government levies a sales tax on each transaction to fund elementary schools, public libraries, and welfare programs: Market system c. 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

Consider the statement: "We want money only to part with it." When people express a desire to 'have money,' they really want

the goods and services that money can buy.

Consider the following statement: "The market system is a profit-and-loss system." This statement is

true, because producer decisions are motivated by the attempt to earn profits.

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

False

Franklin, John, Henry, and Harry have decided to pool their financial resources and business skills in order to open up and run a 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 should be classified as a:

Partnership

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

Ted and Fred

In a command economy scarce goods are allocated by

a government-appointed planning board based on the board's long-term priorities.

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.

Barter requires that you

find a person who has what you want and a person who needs what you have to offer.

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

individual wants are diverse.

Some large hardware stores such as Home Depot boast of carrying as many as 20,000 different products in each store. This volume of goods is the result of

the choice of consumers regarding what to purchase to satisfy their wants and the choice of producers regarding what to produce to maximize profits.

The emergence of the MP3 (iPod) technology is an example of "creative destruction" because

it has replaced compact discs as a technology used for the storage and transfer of music.

In the circular flow model

businesses sell goods and buy labor; households buy goods and sell labor.

Match each term with the correct definition.

a. An institution that brings buyers and sellers together: Market b. The right of private persons and firms to obtain, control, employ, dispose of, and bequeath land, capital, and other property: Private property c. 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: Competition d. 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 enterprise e. What each individual or firm believes is best for itself and seeks to obtain: Self-interest f. Economic transactions willingly undertaken by both the buyer and the seller because each feels that the transaction will make him or her better off: Mutually agreeable g. 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: Freedom of choice

In the circular flow model

resource markets provide for the exchange of labor and product markets provide for the exchange of goods and services.


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