2.3 The Market System

1. Some economists have been puzzled that although entrepreneurs take on the risk of losing time and money by starting new​ businesses, on average their incomes are lower than those of people with similar characteristics who go to work at large firms. William Baumol believes part of the explanation for this puzzle may be that entrepreneurs are like people who buy lottery tickets. On​ average, people who​ don't buy lottery tickets are left with more money than people who buy tickets because lotteries take in more money than they give out. Baumol argues that​ "the masses of purchasers who grab up the​ [lottery] tickets are not irrational if they receive an adequate payment in another​ currency: psychic​ rewards." The term​ "psychic rewards" refers to 2. Psychic rewards that an entrepreneur might receive include ​(check all that ​apply)​:

1. nonmonetary forms of remuneration that are psychologically uplifting. 2. A. being​ one's own boss. B. status within the community. C. the pride of​ self-accomplishment.

1. What are private property​ rights? Private property rights​ are: 2. What role do they play in the working of a market​ system? Private property​ rights: 3. Why are independent courts important for a​ well-functioning economy? Independence is necessary for​ courts:

1. the rights individuals and firms have to the exclusive use of​ tangible, physical property and intellectual property. 2. both a and b. 3. all of the above.

What is the role of an​ entrepreneur?

All the above

The 2012 International Property Rights Index study​ states: ​Those developing countries that respect property rights grow on average faster than those that fail to provide sound legal and political environments and protection for physical property rights. How would this creation of property rights be likely to affect the economic opportunities available to citizens of those countries ranking lowest in property rights​ protections? Owners could use their property as _________________​, ​which, by affecting their ability to start a​ business, would ________ personal income and national wealth.

Colateral for a loan, increase

a. Is the relationship between the price of pies and the number of pies Jacob buys a positive relationship or a negative​ relationship? b. Plot the data... c. Find slope

a. negative relationship c. Slope -1

Firms are likely to produce more of a good or service when its price ___________ and less of a good or service when its price ______________.

rises, falls

A free market is a market with​ ________ government restrictions on how a good or service can be produced or sold and with​ ________ government restrictions on how a factor of production can be employed.

​few; few

1. What is a free​ market? 2. In what ways does a free market economy differ from a centrally planned​ economy? Unlike a free market​ economy,

1. A free market is one where the government does not control the production of goods and services. 2. centrally planned economies have extensive government controls.

1. In many parts of Europe during the​ mid-1770s, governments gave​ guilds, or organizations of​ producers, the authority to control who was allowed to produce a​ good, the amount of the good​ produced, and the price charged for the good. Would you expect more competition among producers in a guild system or in a market​ system? 2. Regarding the entity occupying the center​ (of attention) in the two​ systems, it appears that 3. With regard to the innovation of new products and technologies, the fact that it limited the entry of new producers suggests that the guild system was __________ conductive to such innovation.

1. A market system is clearly more competitive because it allows for the free entry and exit of producers. 2. the consumer is at the center of the market system while the guild system centered on the producer. 3. Less

1. What do economists mean by​ scarcity? 2.Which of the following is not scarce according to the economic​ definition?

1. Economists mean that unlimited wants exceed limited resources. 2. None of these

1. What is an​ entrepreneur? 2. Why do entrepreneurs play a key role in a market​ system?

1. Entrepreneurs operate businesses that produce goods and services. 2. They bring together factors of production.

1. What are the two main categories of participants in​ markets? 2. Which participants are of greatest importance in determining what goods and services are​ produced?

1. Firms and households 2. Households

1. According to Adam​ Smith, which of the following is necessary for the proper functioning of the market​ system? 2. According to Adam​ Smith, which of the following is the instrument the invisible hand uses to direct economic​ activity?

1. For markets to​ work, people must be free to pursue their​ self-interest. 2. prices

1. What does increasing marginal opportunity costs​ mean? 2. What are the implications of this idea for the shape of the production possibilities​ frontier?

1. Increasing the production of a good requires larger and larger decreases in the production of another good. 2. The production possibilities frontier will be bowed outward.

What is the​ circular-flow diagram and what does it​ illustrate?

The​ circular-flow diagram shows how households and firms are linked through product and factor markets.

According to an article in the Wall Street Journal​, the parts contained in the BlackBerry Torch smartphone include a power management chip made by Texas Instruments​ (United States), a memory chip made by Samsung​ (South Korea), a GPS receiver made by CSR​ (United Kingdom), a radio frequency​ (RF) transceiver made by Dialog Semiconductor​ (Germany), an RF transceiver made by Renesas​ (Japan), an application and communications processor made by Marvell​ (United States), a video image processor made by STMicroelectronics​ (Switzerland), and plastic and stamped metal parts made by several firms in China. A firm in Mexico carries out final assembly of the Torch before it is shipped to BlackBerry for sale in the United States and other countries. 1. Is it necessary for all of the managers in all of these firms to know how all of the components of the Torch are manufactured and how the components are assembled into a​ smartphone? 2. Is it necessary for the chief executive officer​ (CEO) of BlackBerry to know this​ information?

1. Of course not. Any given manager need only command the knowledge necessary to produce the component for which​ s/he has responsibility. 2. Generic knowledge about the product is certainly to be expected. But a CEO is more of a strategist​ and, ideally, a​ visionary, who orchestrates the​ conception, design,​ production, and marketing of an innovative product.

1. The British historian Thomas Macaulay once remarked that copyrights are​ "a tax on​ readers." Copyrights are a​ 'tax' on readers in the sense that 2. If copyrights are a​ 'tax' on​ readers, governments provide a legal framework to enforce them because

1. copyrights limit of the supply of related creative work which results in higher prices. 2. copyrights provide needed protection for authors and creators of movies or other artistic works.

1. Which of the following are the two key groups of participants in the circular flow of​ income? 2. In a simple​ circular-flow model, there are flows of​ _________ and flows of​ _________.

1. households and firms 2. Both​ (a) and​ (b) are correct.

1. What is the outcome of enforcing contracts and property rights in a market​ system? 2. If a market system functions​ well, which of the following is necessary for the enforcement of contracts and property​ rights?

1. increased economic activity 2. an independent court system

1. A production possibilities​ frontier: 2. We can show economic​ efficiency: 3. We can show economic​ inefficiency: 4. The production possibilities frontier will shift outward

1. shows the maximum attainable combinations of two goods that may be produced with available resources. 2.with points on the production possibilities frontier. 3. with points inside the production possibilities frontier. 4. If technology advances occurrs

According to an article on​ Phillyburbs.com, some farmers in rural Pennsylvania are causing a​ "stink" by using pig manure for fertilizer. The farmers purchase the pig​ manure, which is an organic​ fertilizer, from a nearby pork processing plant and spread it across the fields where they grow corn and soybeans. The article asserts that the farmers switched to pig manure because of the skyrocketing price of chemical fertilizers. Some of the residents of​ Milford, however, have complained about the​ smell, but the​ "farmers are likely protected under​ Pennsylvania's Right to Farm​ Act, which allows farmers to engage in practices that are common to​ agriculture." 1. In their switch to the organic pig manure​ fertilizer, farmers responded to According to the Pennsylvania Right to Farm​ Act, do the farmers or the townspeople have the property rights to the smell of the air around the​ farms? (Some of the residents did ask the township to urge the farmers to​ plow-under the manure to reduce its​ stench.) 2.According to the Pennsylvania Right to Farm​ Act, ___________ have the property rights to the smell of the air around the farms because the Pennsylvania Right to Farm Act allows

1. the rising price of chemical fertilizers. 2. farmers, farmers to engage in practices that are common to agriculture.

Writing in the New York Times​, Michael Lewis argued that ​"...a market economy is premised on a system of incentives designed to encourage an ignoble human​ trait: self-interest." What incentives does a market system provide to encourage​ self-interest?

Financial reward.

Writing in the eighteenth​ century, Adam Smith conceived of the​ free-market system as an​ "invisible hand" that harnesses the pursuit of private interest to promote the public good.​ Smith's conception remains relevant​ today, notwithstanding the enormous increase in economic complexity since the Industrial Revolution. What is so important about the idea of the invisible​ hand?

Firms will provide consumers what they want without the government.

Identify whether each of the following transactions will take place in the factor market or in the product market and whether households or firms are supplying the good or service or demanding the good or service. George buys a Tesla Model S. Takes place in the _________ market. The household _____________ the good and the firm ___________ the good. Tesla increases employment at its Fremont plant. This takes place in the ________ market. The households __________ the labor and the firm ___________ the labor. George works 20 hours per week at​ McDonald's. This takes place in the ________ market. The household __________ the labor and the firm ___________ the labor. George sells land he owns to​ McDonald's so it can build a new restaurant. This takes place in the _________ market. The household ___________ the factor of production and the firm ____________ the factor of production.

Product Demands, Supplies Factor Supply, Demands Factor Supplies, Demands Factor Supplies, Demands

​"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." What did Smith mean by​ this?

Pursuing their own​ self-interest, entrepreneurs produce the goods and services most desired by their customers for financial reward.

Evaluate the following​ argument: "Adam​ Smith's analysis is based on a fundamental​ flaw: He assumes that people are motivated by​ self-interest. But this​ isn't true. ​ I'm not​ selfish, and most people I know​ aren't selfish."

This statement is based on the misconception that following your​ self-interest and being selfish are the same thing.