Economics Chapter 2 Flashcards
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Questions and Answers

The resource market is the place where resources or the services of households are produced.

False

For a market system to maximize its potential, it must develop methods for ______.

assessing and managing risk

Which statements about the profit system are true? (Select all that apply)

  • It discourages entrepreneurs from making prudent decisions.
  • It encourages entrepreneurs to make prudent decisions. (correct)
  • It is actually a profit and loss system. (correct)
  • It is only focused on profits.

    • In a market system, firm __________ are subject to business risk.

    <p>owners</p> Signup and view all the answers

    What are the two major benefits that arise from the market system's restriction of business risk to owners and investors?

    <p>attracting inputs and focusing attention</p> Signup and view all the answers

    Which of the following is the reason why every society needs to develop an economic system?

    <p>Every society faces the economizing problem.</p> Signup and view all the answers

    Which is considered to be 'pure capitalism'?

    <p>Laissez-faire capitalism</p> Signup and view all the answers

    Which of the following characteristics define a command system? (Check all that apply)

    <p>Government ownership of most or all resources</p> Signup and view all the answers

    What is the command system also known as? (Check all that apply)

    <p>Communism</p> Signup and view all the answers

    Private individuals and firms, not the government, own most of the property resources such as land and capital in a free _______ system.

    <p>Market</p> Signup and view all the answers

    A(n) ______ system is a particular set of institutional arrangements and a coordinating mechanism that responds to the economizing problem.

    <p>Economic</p> Signup and view all the answers

    Is a market system a combination of centralized government initiatives and decentralized actions taken by firms?

    <p>True</p> Signup and view all the answers

    What does the term 'laissez-faire' refer to?

    <p>Limiting the government's interference in the economy.</p> Signup and view all the answers

    An __________ is an institution or mechanism that brings buyers and sellers into contact.

    <p>Market</p> Signup and view all the answers

    Choose those characteristics that best describe a command system.

    <p>A central planning board makes all economic decisions</p> Signup and view all the answers

    Private individuals and businesses are able to utilize property as they wish as a result of:

    <p>the ability to negotiate legally binding contracts and the right of private property.</p> Signup and view all the answers

    Communism exhibits all the characteristics of a ______ system.

    <p>Command</p> Signup and view all the answers

    Mutually agreeable economic transactions take place as a result of:

    <p>Property rights</p> Signup and view all the answers

    In which of the following do private individuals and firms own most of the property resources such as land and capital?

    <p>Market System</p> Signup and view all the answers

    _______________ property rights help to facilitate exchange in a free market system.

    <p>Private</p> Signup and view all the answers

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

    <p>The market system</p> Signup and view all the answers

    Which of the following ensures that entrepreneurs and private businesses are free to obtain and use economic resources to produce their choice of goods and services?

    <p>Freedom of enterprise</p> Signup and view all the answers

    Which of the following represents an institution or mechanism that brings buyers and sellers into contact?

    <p>Market</p> Signup and view all the answers

    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 ______.

    <p>self-interest</p> Signup and view all the answers

    ______ ownership of capital gives capitalism its name.

    <p>Private</p> Signup and view all the answers

    The basis of competition is freedom of ______ exercised in the pursuit of ______.

    <p>choice; money</p> Signup and view all the answers

    The most important feature of property rights is that they ______.

    <p>encourage cooperation by ensuring that only mutually agreeable economic transactions take place.</p> Signup and view all the answers

    Competition among economic units ______.

    <p>implies that producers can enter or leave an industry; diffuses economic power within the businesses and households that make up the economy.</p> Signup and view all the answers

    The title to an automobile or the deed to a cattle ranch assures a buyer that the seller is the legitimate owner of that property. This is an example of property rights _______.

    <p>facilitating exchange</p> Signup and view all the answers

    Which of the following does competition require?

    <p>Two or more buyers and two or more sellers acting independently in a particular market</p> Signup and view all the answers

    Freedom of ________ ensures that entrepreneurs and private businesses are free to obtain and use economic resources to produce their choice of goods and services.

    <p>Enterprise</p> Signup and view all the answers

    Product and resource prices in a market system are determined by ______.

    <p>the interaction between buyers and sellers.</p> Signup and view all the answers

    In a _______ system, people act in their own self-interest.

    <p>Market</p> Signup and view all the answers

    Is it true that no single buyer or seller can dictate the price of the product or resource because others can undercut that price?

    <p>True</p> Signup and view all the answers

    In order to have competition in a market economy, there must be at least _____ or more sellers acting independently in a particular market.

    <p>2</p> Signup and view all the answers

    Freedom of entry and exit of producers enables an economy to adjust to changes in which of the following areas?

    <p>Resource availability, consumer tastes, technology.</p> Signup and view all the answers

    The market system depends on ______ both among buyers and among sellers.

    <p>Competition</p> Signup and view all the answers

    What is the coordinating mechanism in a market system?

    <p>Prices</p> Signup and view all the answers

    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 ______.

    <p>Competition</p> Signup and view all the answers

    Which of the following is the most efficient method of production?

    <p>Using a combination of labor, capital and technology.</p> Signup and view all the answers

    The interaction between buyers and sellers in a market system determines ______.

    <p>product and resource price.</p> Signup and view all the answers

    Is it true that specialization means using available resources to produce a variety of goods and services?

    <p>False</p> Signup and view all the answers

    Is it true that competition among sellers and government diffuses economic power within the economic units that make up an economy?

    <p>False</p> Signup and view all the answers

    Which of the following does competition imply?

    <p>It provides the economy with the flexibility needed to remain efficient over time.</p> Signup and view all the answers

    _____________ is the use of resources by an individual, firm, region, or nation to produce one or a few goods or services rather than the entire range of goods and services.

    <p>Specialization</p> Signup and view all the answers

    Under the market system, ______ coordinate the decisions made by households and businesses.

    <p>markets and prices.</p> Signup and view all the answers

    Which of the following correctly state the importance of advanced technology and capital goods? (Check all that apply)

    <p>The new technology can enhance the productivity of workers.</p> Signup and view all the answers

    How does human specialization or division of labor contribute to a society's output?

    <p>Specialization fosters learning by doing.</p> Signup and view all the answers

    Rather than produce a wide array of goods and services, it is more efficient for economies to produce goods and services based upon ______.

    <p>specialization</p> Signup and view all the answers

    Is it true that money complicates exchange or trade?

    <p>False</p> Signup and view all the answers

    Which of the following best illustrates exchange through barter?

    <p>Farmer John trades his corn for some of his neighbor's oranges.</p> Signup and view all the answers

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

    <p>specialization.</p> Signup and view all the answers

    An active, but limited, government is characteristic of which type of economic system in modern advanced industrial economies?

    <p>Modern market system.</p> Signup and view all the answers

    Identify the five fundamental questions that all economies, whether market or command, must address.

    <p>How will the system promote progress?</p> Signup and view all the answers

    ______ is the human specialization of some process.

    <p>Division of Labor</p> Signup and view all the answers

    Which of the following collectively direct resources to industries that are meeting consumer wants?

    <p>Consumer sovereignty; Dollar votes.</p> Signup and view all the answers

    Money performs several functions, but first and foremost it is a ______.

    <p>medium of exchange.</p> Signup and view all the answers

    Goods and services are produced efficiently when production is organized in combinations and ways ______.

    <p>that minimize the cost per unit of output.</p> Signup and view all the answers

    Which of the following requires a coincidence of wants between a buyer and a seller?

    <p>Barter</p> Signup and view all the answers

    In a market economy, goods and services are distributed ______.

    <p>to consumers on the basis of their ability and willingness to pay the existing market price.</p> Signup and view all the answers

    Modern market economies usually have a(n) ______.

    <p>active, but limited government.</p> Signup and view all the answers

    If increasing numbers of consumers decide to purchase organically farmed fruit rather than conventionally farmed fruit, how is the market likely to respond?

    <p>Organic fruit profits will rise; Conventional fruit profits will fall.</p> Signup and view all the answers

    The five questions that every society must address reflect the reality of (scarce/infinite) resources in a world of (limited/unlimited) wants.

    <p>Scarce; Limited</p> Signup and view all the answers

    Technological improvements or advancements also include new and improved methods that ______ production costs.

    <p>Reduce.</p> Signup and view all the answers

    Is it true that in a market system, consumers exercise consumer sovereignty, which is crucial in determining the types and quantities of goods produced?

    <p>True</p> Signup and view all the answers

    In recent years, new MP3 and digital technologies have replaced compact disks. This is an example of ______.

    <p>Creative destruction.</p> Signup and view all the answers

    Which of the following best describe how goods and services should be produced?

    <p>By utilizing the right mix of labor and capital.</p> Signup and view all the answers

    The operation of ______ creates a curious unity between private interests and social interests.

    <p>A Market System.</p> Signup and view all the answers

    Which of the following statements describe who will get the goods and services produced in a market economy?

    <p>Those who have sufficient income and want to spend money on a particular good.</p> Signup and view all the answers

    Technological advancements, such as the personal computer and medical discoveries, are primarily driven by the profit motive. However, such advancements eventually promote the public or social interest as though they are guided by _____.

    <p>an invisible hand.</p> Signup and view all the answers

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

    <p>Buyers want more juice and less milk. Producers increase spending only on juice.</p> Signup and view all the answers

    Three virtues of the market system include ____, _____, and ______.

    <p>freedom; efficiency; incentives.</p> Signup and view all the answers

    Which of the following describes a technological advancement?

    <p>All of the above.</p> Signup and view all the answers

    Which of the following best describe the virtue of efficiency?

    <p>The market encourages the development and adoption of new and more efficient production techniques.</p> Signup and view all the answers

    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 _____.

    <p>creative destruction.</p> Signup and view all the answers

    Which of the following are reasons why the command economies of the former Soviet Union and of Eastern Europe failed? (Check all that apply)

    <p>Incentive problems</p> Signup and view all the answers

    The name of the 1776 book authored by Adam Smith noting that the operation of a market economy creates unity between private and social interests is called ______.

    <p>The Wealth of Nations.</p> Signup and view all the answers

    Which of the following are components of the circular flow model?

    <p>Households</p> Signup and view all the answers

    The 'invisible hand' guides firms and resource suppliers to promote ______ even as they seek to further their own interests.

    <p>Public or social interests.</p> Signup and view all the answers

    In the circular flow model, households sell resources to and buy products from _______.

    <p>Businesses.</p> Signup and view all the answers

    In the circular flow model, households ______ resources and ______ products.

    <p>sell; buy.</p> Signup and view all the answers

    In the circular flow model ______.

    <p>households spend their income in the product market.</p> Signup and view all the answers

    Which of the following occur in the resource market?

    <p>All of the above.</p> Signup and view all the answers

    Which of the following are true of the partnership form of business organization?

    <p>Partners pool financial resources and business skills.</p> Signup and view all the answers

    How does the market system develop methods for analyzing and managing risk?

    <p>By presenting businesses with the economic consequences of their decisions.</p> Signup and view all the answers

    Which type of business structure is considered an independent legal entity?

    <p>Corporation.</p> Signup and view all the answers

    How does the profit system guide entrepreneurs?

    <p>By punishing them with losses when they choose poorly; and rewarding them with profits when they choose wisely.</p> Signup and view all the answers

    The function of firms in the circular flow model is to ______ resources and ______ products.

    <p>purchase; sell.</p> Signup and view all the answers

    A firm's owners are called ______ because they are only paid after employees, suppliers, and lenders have been paid.

    <p>residual claimants.</p> Signup and view all the answers

    The product market is the place where _______.

    <p>businesses sell goods and services and households buy goods and services.</p> Signup and view all the answers

    The market system attracts inputs and focuses owners' attention on risk management by restricting business risk to which two groups?

    <p>Businesses and investors.</p> Signup and view all the answers

    Study Notes

    Economic Systems

    • Every society must develop an economic system to address the economizing problem.
    • Economic systems can be categorized as market or command systems based on resource ownership and decision-making processes.

    Capitalism and Command Systems

    • Laissez-faire capitalism involves minimal government intervention, primarily focusing on protecting private property and enforcing contracts.
    • Characteristics of a command system include government ownership of resources and a central planning board, also known as communism or socialism.

    Market Systems

    • In a market system, private individuals and firms own most resources, including land and capital.
    • The system encourages self-interest, where economic units pursue their objectives, benefitting others in the process.

    Property Rights and Economic Freedom

    • Private property rights facilitate voluntary exchanges, enhancing cooperation and economic transactions.
    • Freedom of enterprise allows entrepreneurs to utilize resources and produce goods, contributing to economic dynamism.

    Price Mechanism

    • Prices in a market system are determined by interactions between buyers and sellers, coordinating decisions and indicating resource allocation.
    • Competition is fundamental, requiring at least two buyers and two sellers, fostering efficiency and flexibility in the economy.

    Specialization and Division of Labor

    • Specialization improves productivity by allowing individuals or firms to focus on specific tasks, increasing efficiency.
    • The division of labor enhances resource utilization and contributes to economic output.

    Circular Flow Model

    • The circular flow model illustrates the interactions between households and businesses, showing how resources and products flow in the economy.
    • Households provide resources to firms in the resource market and purchase goods in the product market.

    Role of Money

    • Money serves as a medium of exchange, simplifying transactions and facilitating trade over barter systems, which require a coincidence of wants.
    • The market economy is driven by consumer sovereignty, where consumer preferences dictate production and resource allocation.

    Technological Advancement

    • Technological improvements often lead to creative destruction, where new innovations displace outdated practices and products.
    • Efficiency in production is achieved by combing labor, capital, and technology effectively.

    Market Failures and Economic Challenges

    • Command economies, like those of the Soviet Union, failed due to coordination and incentive problems.
    • Market systems address fundamental economic questions regarding production, distribution, and responsiveness to consumer demands.

    Business Structures

    • A sole proprietorship is owned by a single individual, while partnerships involve two or more owners sharing responsibilities and profits.
    • Corporations operate as legal entities, capable of incurring debts and owning assets independently of their owners.

    Competition and Consumer Sovereignty

    • Competition promotes flexibility, allowing markets to adapt to changes in technology, resource availability, and consumer preferences.
    • Consumer sovereignty ensures that goods and services produced reflect the collective wants and needs of society.

    Risk Management in Market Systems

    • The profit system guides firms by rewarding wise decisions with profits and penalizing poor choices with losses.
    • Effective risk management allows businesses to navigate uncertainties in the market environment, attracting investments.

    Fundamental Economic Questions

    • All economies must address what goods and services to produce, how to produce them, who receives them, how to accommodate change, and how to promote progress.

    Key Virtues of the Market System

    • Important virtues include efficiency, incentives, and freedom, which enhance resource allocation, encourage innovation, and allow for personal economic choices.

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    Test your knowledge with these flashcards covering key concepts from Chapter 2 of Economics. This quiz focuses on the fundamental reasons for economic systems and the concept of pure capitalism. Perfect for quick revision or learning new terms related to economic principles.

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