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Economics Chapter 2 Test – Flashcards

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8 July 2022

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The three questions economies must answer are:

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1. What goods and services will be produced? 2. How will they be produced? 3. For whom will they be produced?

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Economic system

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the set of mechanisms and institutions used to resolve the what, how, and for whom questions

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The standards used to distinguish among economic systems include:

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1. Who owns the resources 2. What decision making process is used to allocate resources and products 3. What type of incentives drive economic decision makers

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True or False: The three economic questions are not interdependent

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False, they are

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Characteristics of a pure market economy

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1. private firms account for all production, there is no government 2. private ownership of all resources 3. coordination of economic activity based on prices generated in free, competitive markets 4. Any income from selling resources goes directly to the resource owner

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True or False: Resource owners have property rights to the use of their resources and are free to sell them ti the higher bidder. Producers are free to make and sell what they believe will be profitable, and consumers are free to buy whatever they can afford

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true

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T or F Markets answer the what, how and for whom questions in a pure market economy

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true, they provide information about scarcity, as well as incentives to producers and consumers and distribute income to resource suppliers. They guide resources to their most productive use and channel them to consumers who value them most

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The "invisible hand" of markets

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According to Adam Smith, markets coordinate production by an invisible hand. Although each individual pursues their self interest, the invisible hand of market competition promotes the general welfare. Voluntary choices in competitive markets answer the what, how, and for whom questions

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The problems with pure market economies are:

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1. Difficulty enforcing property rights 2. Some people have few resources to sell 3. Some firms try to monopolize markets 4. No public goods 5. externalities 6. economic fluctuations

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The characteristics of a pure command economy are:

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1. all resources are government owned and controlled 2. government officials coordinate production 3. ownership of all resources is shared, or communal 4. central planners answer the what, how and for whom questions.

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T or F In a pure command economy, markets control all resources including labor

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False, the state or central authority

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The role of central planners is

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to decide how to produce goods and who will get them, direct production through state run enterprises

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The problems with a pure command economy are

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1. consumers get low priority 2. little freedom of choice 3. central planning can be inefficient 4. resources owned by the central authority are sometimes wasted 5. environmental damage 6. no role for entrepreneurs

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Mixed economy

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combines central planning and competitive markets

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The US economy is considered a

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mixed economy, it is also considered a market economy

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Transitional economy

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in the process of shifting from a command to a market economy

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privatization

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the process of converting government enterprises into private ones

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traditional economies

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shaped largely by custom and tradition

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The simplifying assumptions of the PPF are

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1. it focuses on two categories of products, consumer goods and capital goods 2. the focus is on production during a given period 3. the resources available are fixed in both quantity and quality during the period 4. society's technology doesn't change 5.the rules of the game that coordinate production and exchange are also fixed, these include legal systems, property rights, and the customs and conventions of the market

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Production Possibilities Frontier (PPF)

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shows the possible combinations of two types of goods that can be produced when available resources are employed efficiently

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efficiency

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producing maximum output using available resources

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Resources are employed efficiently when

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when there is no change that could increase production of one good without decreasing production of another

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Movement down the PPF indicates

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the opportunity cost of producing more capital goods is less consumer goods

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T or F The resources in the economy are not perfectly adaptable to producing both types of goods, therefore the opportunity cost of producing more capital increases when the economy produces more of it

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true

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law of increasing opportunity cost

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reflected by shape of PPF, if the economy uses all resources efficiently, then each additional increment of one good requires the economy to give up successively larger increments of another good

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An outward shift of the PPF reflects

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economic growth, an expansion of the economy's production possibilities, or ability to produce

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Things that cause the PPF to shift outward are

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increase in labor force or skill, an increase in the availability of other resources like oil

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The PPF shifts inward when

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there is a decrease in the availability of resources, such as sandstorms causing people to leave

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Other factors that shift the PPF outward include

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increase in production of capital goods and technological change, improvements in the rules of the game

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The rules of the game

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the formal and informal institutions that support the economy- the laws, customs, manners and conventions and other institutional underpinnings that encourage people to pursue productive activity

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T or F the PPF does not emphasize the need for choice

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false, it does because choice will determine consumption and the capital stock available next period

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absolute advantage

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being able to produce something using fewer resources than others require

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the best guide for deciding who should do what job is

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comparative advantage

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law of comparative advantage

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the worker with the lowest opportunity cost for producing an output should specialize in that output

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specialization

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when workers focus on individual tasks, enabling them to become more efficient and productive

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Gains of specialization

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saving time

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T or F absolute advantage focuses on who uses fewer resources, comparative advantage focuses on what else the resources could have produced, or their opportunity cost

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True

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barter

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a system of exchange in which products are traded directly for other products

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money

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the one thing everyone is willing to accept in exchange for all goods and services

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division of labor

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organizes the production process so that each worker specializes in a separate task

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Things the division of labor does include

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takes advantage of individual preferences and natural abilities, allows workers to gain experience in a particular task, reduces the need to shift between different tasks, and allows the introduction of labor saving machinery

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T or F traditional economies are based primarily on custom and tradition

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true

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T or F the three economic questions are completely independent of one another

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false

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T or F in command economies the government owns all resources

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true

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T or F the number of command economies who are beginning to embrace the market economy has increased in recent years

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true

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T or F Command economies ensure that no resources are wasted

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false

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T or F pure command economies can result in rationed goods

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true

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T or F Markets play a relatively small role in the US economy

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false

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T or F In a pure command economy, it may be difficult to enforce property rights

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true

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T or F Citizens of countries with traditional economies are less likely to experience discrimination than those with market economies

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false

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T or F Command economies cause a great deal of environmental damage

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true

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In which of these economies would some firms have the incentive to monopolize markets? a.) pure market economy b.) pure command economy c.) traditional economy d.) transitional economy

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a. pure market economy

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Pure market economies do NOT involve a. households b. government c. firms d. factories

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b. government

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_______ enjoys the most control in a pure command economy a. the government b. the wealthy c. independently owned businesses d. no one entity

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a. the government

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The US is considered a ______ a. pure market economy b. market economy c. command economy d. transitional economy

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b. market economy

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Which question do economies not have to answer? a. how will goods and services be produced b. how many goods and services will be produced c. what goods and services will be produced d. for whom will goods and services be produced

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b. how many goods and services will be produced

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A pure market economy will most benefit a a. high school dropout b. single mother c. disabled veteran d. middle class businessperson

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d. middle class business person

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Which of the following allows consumers the most choice a. command economy b. transitional economy c. pure market economy d. traditional economy

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c. pure market economy

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Which of these countries has closest to a pure command economy a. Canada b. North Korea c. Australia d. England

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b. north korea

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Which of these groups would a pure command economy benefit most a. wealthy b. government officials c. highly educated d. general public

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d. general public

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Which of these answers the three economic questions in a pure market economy? a. culture b. government c. markets d. military

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c. markets

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Who coordinates the activities of the marketplace?

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no individual or small group, individuals make decisions according to incentives

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What does the metaphor of the invisible hand illustrate?

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the invisible hand of market competition promotes the general welfare

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Why have so many command economies allowed a greater role for private ownership and market competition?

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the many central planning failures such as the low priority of consumers and little freedom of choice. economies have moved towards a market in order to increase efficiency and compete in a global economy

Economics Chapter 2 Test – Flashcards

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