ECON 202 - Chapter 2

In a command economy, scarce goods are allocated by

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

What is characterized by the private ownership of resources and the use of markets to coordinate and direct economic activity?

A market systems

Modern modern economies usually have

Active but limited government

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

In the circular flow model, businessess _______; households _______ (Follow with a semicolon for each situation)

Businesses sell goods and buy labor; households buy goods and sell labor

The product market is the place where

Businesses sell goods and services and households buy goods and services

Which of the following would be an example of the system accommodating change?

Buyers want more juice and less milk. Producers increase spending only on juice.

What best describes how goods and services should be produced? (Follow with a comma for each situation)

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

The basis of competition is a freedom of __ exercised in the pursuit of ____ (Follow with a comma for each situation)

Choice, Money

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.

In a circular flow economy, the market economy creates

Continuous flow of goods and services, resources, and money

"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" is an example of

Creative destruction

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

Competition among economic units ___(Follow with a comma for each situation)

Diffuses economic power within the businesses and households that make up the economy, Implies that producers can enter or leave an industry

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

Why does every society need to develop an economic system?

Every society faces the economizing problem

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

False

Barter requires that you

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

What does competition require? (Follow with a comma for each situation)

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 are the three virtues of the market system? (Follow with a comma for each situation)

Freedom, Efficiency, Incentives

The term "laissez-faire" suggests that

Government should not interfere with the operation of the economy

What occurs in the resource market? (Follow with a comma for each situation)

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

What are the five fundamental questions that all economies, whether market or command, must address? (Follow with a comma for each situation & exclude question marks)

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

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

The command economies of the former Soviet Union and of Eastern Europe failed due to: (Follow with a comma for each situation)

Incentive problems, Coordination problems

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

Individual wants are diverse

"Each day, central planners in the old Soviet Union were tasked with setting 27 million prices...correctly" is an example of

Invisible hand

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

Invisible hand

"Managers of the old Soviet Union often sacrificed product quality and variety because they were being rewarded bonuses for quantitative, not qualitative, targets" is an example of

Invisible hand

Which is considered to be "pure capitalism," in which the role of government is essentially limited to that of protecting private property and establishing a legal environment for enforcing contracts and market activity?

Laissez-faire capitalism

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

In a market system, scarce goods are allocated by

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

What is the coordinating mechanism in a market system?

Prices

__ ownership of capital gives capitalism its name

Private

The market system depends on private property an the protection of property rights to

Provide an incentive to maintain the property and allow for the orderly transfer of property ownership

The use of money

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

The "invisible hand" guides firms and resource suppliers to promote __ even as they seek to further their own interests

Public or social interests

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

In the circular flow model

Resource markets provide for the exchange of labor and product markets provide for the exchange of goods and services

The five questions that every society must address reflect the reality of ____ resources in a world of ___ wants (Follow with a comma for each situation)

Scarce, Unlimited

The emergence of self-driving cars is an example of creative destruction because

Self-driving cars will likely replace most cars that require drivers

When every economic unit in a society attempts to achieve its own particular goal, usually requiring delivering something of value to others, it is referred to as

Self-interest

What is found in the product market (Follow with a comma for each situation)

Services, Goods

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

Specialization

The term "divisions of labor" means that workers

Specialize in tasks that take advantage of their individual abilities and skills

In the circular flow model, households __

Spend their income in the product market

Some large hardware stores such as Home Depot boast of carrying as many as 20,000 different product 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

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

What characteristics best describe a command system? (Follow with a comma for each situation)

The government owns most property resources, A central planning board makes all economic decisions concerning resources

Advanced technology and capital goods are important because (Follow with a comma for each situation)

The new technology can enhance the productivity of workers, The most direct methods of producing a good or service are often the least efficient

In a market economy, goods and services are distributed __

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

When an economy relies on specialization

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

True or false: In a market system, consumers exercise consumer sovereignty, which is crucial in determining the types and quantities of goods purchased

True

Consider the 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

Consider the statement "Competition is the disciplinarian of the market economy." This statement is

True because when producers face competition, they are driven to provide goods and services at the lowest possible cost