Microeconomics Chapter 2

According to Adam Smith, what is necessary for the proper functioning of the market system?

For markets to work, people must be free to pursue their self-interest

According to Adam Smith, what is true?

Individuals usually act in a rational, self-interested way.

What statements is most consistent with positive economic analysis?

The United States would be better off if it specialized in the production of some goods, and then traded some of them to other countries

What happens if a country produces a combination of goods that efficiently uses all of the resources available in the economy?

The country is operating on its production possibilities frontier.

What would create economic growth; that is, shift the production possibilities frontier outward?

an increase in the available labor an increase in technology that affects the production of both goods an increase in the available natural resources

If a market system functions well, what is necessary for the enforcement of contracts and property rights?

an independent court system

In a free market system, what groups brings together the factors of production— labor, capital, and natural resources—in order to produce goods and services?

entrepreneurs

In what markets are factors of production, such as labor, capital, natural resources, and entrepreneurial ability traded?

factor markets

Fill in the blanks. In a simple circular-flow model, there are flows of .

factors of production; goods and services funds received from the sale of factors of production; spending on final goods and services

If a country has a comparative advantage in the production of a good, then that country

has a lower opportunity cost in the production of that good.

What comprises the two key groups of participants in the circular flow of income?

households and firms

What is the outcome of enforcing contracts and property rights in a market system?

increased economic activity

What is the name given to the highest-valued alternative that must be given up to engage in any activity?

opportunity cost

According to Adam Smith, what is the instrument the invisible hand uses to direct economic activity?

price

Absolute advantage is the ability of an individual, firm, or country to

produce more of a good or service than competitors using the same amount of resources.

Which of the following refers to markets where goods such as computers or services such as medical

product markets

What are patents and copyrights designed to do?

protect intellectual property rights

The principle of increasing marginal opportunity cost states that the more resources devoted to any activity, the ______ the payoff to devoting additional resources to that activity.

smaller

Generally speaking, for a market system to work, individuals must

take risks and act in rational, self-interested ways.

A production possibilities frontier will be linear instead of bowed out if

the opportunity cost of producing more of either of the two goods is constant.

Whiat is critical to the success of a market system?

to allow individuals or firms to have exclusive use of their property

What is the role of an entrepreneur?

to operate a business that produces a good or service. to bring together the factors of production—labor, capital, and natural resources. to take risks.