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Capitalism

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A system of economic organization characterized by private ownership of the factors of production and their operation for profit under predominantly competitive conditions.

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"Free Enterprise"

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Capitalism

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Six institutions of capitalism

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1. Private Property 2. Self Interest ("the invisible hand") 3. Economic Individualism ("Laissez-Faire") 4. Competition and the Free Market 5. The Price System 6. Government: Rule maker, Protector, Empire

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The first institution of capitalism & the most basic element of capitalism

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Private Property

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Private property assures each person

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the right to acquire economic goods and resources by legitimate means, to enter into contracts concerning their use and, and to dispose them as desired.

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Person associated with private property & their views

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John Locke (17th century English philosopher) set forth the concept that private property is a "natural right" independent of the power of the state. He believed this right provides maximum benefits for society as a whole.

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The granting of private property fulfills 3 important economic functions:

answer

1. It provides owners with INCENTIVES to make the most productive use of their assets. 2. It strongly influences the DISTRIBUTION OF WEALTH and income by allowing people to accumulate assets and PASS THEM ON to others at the time of death. 3. It makes a high degree of EXCHANGE possible because people have PROPERTY RIGHTS before those rights can be transferred.

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The second institution of capitalism

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Self Interest "the invisible hand"

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Person associated with Self interest and the "invisible hand"

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Adam Smith (1776, Scottish professor of philosophy) who published "The Wealth of Nations". Smith described that each person pursuing SELF-INTEREST without interference from the government, will be led, as if by an invisible hand, to achieve the best good for society.

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In order for self interest to be an effective institution of capitalism, people must:

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be RATIONAL THINKERS and attempt to obtain the most amount of satisfaction for the least amount of sacrifice or cost.

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The third institution of capitalism

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Economic individualism

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Laissez-faire

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"leave it alone" (referring to the government's absence in the free market)

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Who is associated with "laissez-faire"

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A manufacturer by the name LEGENDRE (speaking to the finance minister of late 17th century France: Jean Baptiste Colbert)

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We interpret Laissez-faire (or economic individualism) to mean

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the absence of government intervention leads to economic individualism and economic freedom (not total absence, we still need protection for the general welfare of society via prohibitions and laws).

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Economic individualism

answer

(3rd institution of capitalism) As consumers, they are free to spend their income as they choose, and as producers, they are free to purchase the economic resources they desire and to use these resources as they wish.

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The fourth institution of capitalism

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Competition and the Free Market

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What competition means for a market:

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There is rivalry among sellers of similar goods to attract customers and among buyers to secure the goods that are wanted. There is rivalry among workers to obtain jobs and among employers to obtain workers. There is also rivalry among buyers and sellers of resources to transact business on the best terms that each can get from the other.

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Ideal or theoretical capitalism is often described as:

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a free-market system

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A free market

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A market where buyers and sellers can engage in transactions without restrictions imposed by government or any external force.

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Two characteristics of a free market

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1. LARGE # OF BUYERS AND SELLERS with small enough share of the total business so no participant can affect the price of the goods 2. buyers and sellers are UNENCUMBERED BY ECONOMIC OR INSTITUTIONAL RESTRICTIONS and they POSSESS FULL KNOWLEDGE of market prices and alternatives. As a result, THEY ENTER AND LEAVE THE MARKET AS THEY SEE FIT.

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Two functions of a free market

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1. It establishes competitive prices both for consumer goods and for the factors of production 2. It encourages the efficient use of economic resources

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The fifth institution of capitalism

answer

The price system

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The price system may be viewed as a system of

answer

rewards and penalties; Rewards includes profits for firms and people who succeed, and penalties include losses or even bankruptcy for those who fail.

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The prices of anything reflect

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the quantities that sellers make available and the quantities that buyers wish to purchase.

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If buyers want to buy more than sellers have available,

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the prices of that good will rise encouraging the suppliers to produce more.

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If buyers want to buy less than sellers have available,

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the prices of that good will fall, this will encourage buyers to purchase more of it.

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The sixth and final institution of capitalism

answer

Government as a rule maker, protector, and empire

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The functions of the government in a market as identified by Laissez-faire

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Maintaining order Defining property rights Enforcing contracts Promoting competition Issuing money Deciding disputes over the interpretation of rules etc.

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In a capitalist society, government's overall role in the economy is

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to protect the welfare of society and to reconcile conflicts of values resulting from free exercise of property rights

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The U.S. Economy is

answer

a MIXED economy (between capitalist and command) NOT a pure capitalist economy

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The four goals of an economic system

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Efficiency Equity Stability & Growth

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The four goals of an economic system are goals of what type of market systems?

answer

All, they are a universal set of goals from capitalist societies to socialist societies.

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"Full employment of resources"

answer

Efficiency (first economic goal)

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First goal of economics

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Efficiency

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Efficiency

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The best use of available resources to attain a desired result.

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Two kinds of efficiency

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Technical and Economic (Allocative)

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A firm, industry, or economic system is said to have achieved technical efficiency when:

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It is producing maximum output by making the fullest possible utilization of available inputs. The available resources are said to be, "fully employed".

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How we are certain we have reached technical efficiency

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NO change in the combination of inputs can be made that will increase the output of one product without decreasing the output of another.

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Be able to give an example of technical efficiency

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Farmer producing wheat and corn at full employment of resources, etc.

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An ECONOMIC SYSTEM is technically efficient when:

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if every producing unit in the system has attained technical efficiency (the greatest possible ratio of physical output to available physical input (resources)).

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How we can be certain a society has reached technical efficiency

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No change in the combination of society's resources can be made that will increase the output of one product without decreasing the output of another.

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The second type of efficiency

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Economic (allocative) Efficiency

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The mantra of allocative efficiency

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An economic system ought to deliver the goods and services that people want and are able to pay for

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An economy has said to have reached economic efficiency when:

answer

it is producing that combination of goods and servieces that people prefer, given their incomes.

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How we can be certain a society is economically efficient

answer

No change can be made in the combination of society's resources that will make someone better off without making someone else worse off--each in their own estimation.

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It is possible to have ______ efficiency without having ______ efficiency

answer

Technical; Economic

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The second goal of economics

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Equity; fairness or economic justice

question

Equity says income distribution should be ________ not _________.

answer

fair/just; equal

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Economic equity is a: normative or positive issue?

answer

normative

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The third goal of economics

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Stability (steady average price level)

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What the goal of stability does NOT mean

answer

That ALL prices should be stable

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What the goal of stability DOES mean

answer

the general AVERAGE level of prices should be reasonably stable

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Why the goal of stability is important

answer

The costs to society of a steadily rising average price-level-inflation are serious and pervasive

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The ways inflation does harm to a society

answer

1. it impairs efficiency by lowering incentives to produce 2. it redistributes income arbitrarily and inequitably by reducing many people's purchasing power by disproportionate amounts 3. it greatly weakens the nation's ability to compete in the world markets when prices at home rise faster than those in countries with which we trade

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The fourth goal of economics

answer

Growth

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what is meant by "growth" as a goal?

answer

an increase in the quantity of goods and services produced per person (AKA a rising standard of living).

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How is economic growth related to the other goals of efficiency, stability, and equity

answer

By maintaining STABILITY, an economy avoids substantial price fluctuations and is better able to encourage EFFICIENCY--continuous full-employment of available resources. This, in turn, leads to a robust volume of economic activity and to steady economic GROWTH.

question

The benefits of economic growth

answer

living standards are enhanced for all income groups (proportionally)

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The goals of economics are both ________ & ________.

answer

universal (pursued by all nations regardless of their economic system); all inclusive (they encompass all of the economic objectives that societies seek. Any other economic goal you may be able to think of may be related to one of the four goals)

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All four goals of economics are not easily attained because their realization may involve certain sacrifices (for what two reasons?)

answer

1. Freedom of choice sometimes conflicts with governmental direction (Freedom of choice may not always lead to the economic goals of efficiency, equity, stability, and growth. Or it may impede on certain social goals. A society may decide to sacrifice the freedom of choice to rely instead on gov't direction and control to correct the situation) 2. The four goals conflict with each other (efficiency can conflict with stability if a high level of employment exerts upward pressure on prices. growth can conflict with equity if a rising volume of output benefits some groups more than others)

question

Decisions involve:

answer

trade-offs (every decision entails a choice between alternatives)

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If we are to make rational decisions, we must understand

answer

the tradeoffs

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tradeoff

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the cost of choosing one objective over another

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Economics is BEST defined as the study of how: a.) to classify resources used to produce final goods and services. b.) resources are apportioned to satisfy human wants. c.) people make rational decisions. d.) technology can be used to change scarce resources into free resources.

answer

c.) people make rational decisions

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Because of scarcity: a.) resources are limitless. b.) wants are limited. c.) choices are unlimited. d.) we face tradeoffs in nearly every choice we make.

answer

d.) we face tradeoffs in nearly every choice we make

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Paying a salesperson more for increased sales is an example of: a.) an incentive. b.) an opportunity cost. c.) efficiency. d.) equity.

answer

a.) an incentive

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Macroeconomics is concerned with issues such as: a.) which orange juice to buy. b.) unemployment. c.) which job to take. d.) what price to charge for goods.

answer

b.) unemployment

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Supply and demand analysis is used: a.) only in microeconomics. b.) only in macroeconomics. c.) in both microeconomics and macroeconomics. d.) in neither microeconomics nor macroeconomics.

answer

c.) in both microeconomics and macroeconomics

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The economics of uranium mining would be studied in: a.) microeconomics. b.) macroeconomics. c.) deductive logic. d.) inductive logic.

answer

a.) microeconomics

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A theory composed of a number of assumptions and facts boiled down to their basic relevant elements is called a: a.) metaphor. b.) model. c.) conclusion. d.) practice.

answer

b.) model

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When goods are produced at the lowest possible cost, an economy is said to have achieved: a.) production efficiency. b.) allocative efficiency. c.) cheap production. d.) inferior quality goods.

answer

a.) production efficiency

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In the study of economics, the goals of efficiency and equity are often: a.) compatible. b.) conflicting with one another. c.) objectively definable. d.) given equal emphasis.

answer

b.) conflicting with one another

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Scarcity: a.) can be eliminated with adequate resources. b.) is faced by all individuals and societies. c.) is eliminated with greater technology. d.) is synonymous with poverty.

answer

b.) is faced by all individuals and societies

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The opportunity costs of attending college do NOT include: a.) required student activity fees. b.) the forgone wages that could have been earned working. c.) the costs of textbooks or eBooks. d.) the expenditures for food.

answer

d.) the expenditures for food

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When the government chooses to use resources to build tourist centers, the chosen resources are no longer available to build highways. This BEST illustrates the concept of: a.) scarcity. b.) opportunity cost. c.) efficiency. d.) macroeconomics.

answer

b.) opportunity cost

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Which is TRUE about specialization and exchange between two individuals? a.) They generally benefit the poorer individual at the expense of the richer individual. b.) They generally benefit the richer individual at the expense of the poorer individual. c.) They generally benefit the poorer individual as well as the richer individual. d.) They generally benefit neither the poorer individual nor the richer individual.

answer

c.) They generally benefit the poorer individual as well as the richer individual

question

Which of the following is a key idea in economic thinking? a.) Scarcity exists for the poor but not for the rich. b.) Incentives matter. c.) The value of a good can be objectively measured, and is the same for everyone. d.) All of these are key ideas in economic thinking.

answer

b.) Incentives matter

question

Rational behavior requires "thinking at the margin." Which of the following is an example of this type of thinking? a.) deciding whether a second burger is worth the extra $2 b.) deciding whether your overtime pay is worth working on Saturday (your day off) c.)deciding whether to pay a fine for polluting the local harbor or installing antipollution machinery d.) All of these are examples of "thinking at the margin."

answer

d.) All of these are examples of "thinking at the margin"

question

People use _____ to determine how many hours to work, and businesses use _____ to determine how much of their product they are willing to supply to the market. a.) marginal analysis; marginal analysis b.) allocative efficiency; production efficiency c.) production efficiency; marginal analysis d.) marginal analysis; allocative efficiency

answer

a.) marginal analysis; marginal analysis

question

Which of the following is NOT an example of market failure? a.) Water is polluted by a paper company located by a river. b.) Air is polluted by a manufacturing firm. c.) Competition leads firms to provide products at the lowest possible price. d.) Consumers must buy water from one local water utility.

answer

c.) Competition leads firms to provide products at the lowest possible price

question

Which of the following is a case when the government should intervene in the economy? a.) when consumers cannot make up their minds what they want to purchase b.) when sellers make poor business decisions c.) when producers use the least-cost methods of production d.) when the market fails to provide goods efficiently

answer

d.) when the market fails to provide goods efficiently

question

Which of the following is NOT considered a basic economic question? a.) How will the system accommodate change? b.) What goods and services will be produced? c.) Who will receive the goods and services? d.) How will these goods and services be produced?

answer

a.) How will the system accommodate change?

question

In a ____ economy, individuals and firms own most resources, and in a _____ economy, the government controls most resources. a.) market; planned b.) planned; socialist c.) planned; market d.) socialist; planned

answer

a.) market; planned

question

Which is an example of capital in the production process of an amusement park? a.) the electricity used at the park b.) the mechanics who maintain the equipment d.) the roller coaster c.) the ticket-taker

answer

d.) the roller coaster

question

_______________ occurs when goods and services are produced at their lowest resource cost, while _________________ occurs when the mix of goods and services produced is the most desired by society. a.) Allocative efficiency; production efficiency b.) Production efficiency; social efficiency c.) Allocative efficiency; social efficiency d.) Production efficiency; allocative efficiency

answer

d.) Production efficiency; allocative efficiency

question

If an economy is operating at a point that is inside of its production possibilities frontier, then it can be assumed that its resources are: a.) misallocated. b.) overutilized. c.) fully utilized. d.) underutilized.

answer

d.) underutilized

question

A production possibilities frontier that is a straight line is the result of: a.) constant opportunity costs. b.) increasing opportunity costs. c.) scarcity. d.) underemployment of resources.

answer

a.) constant opportunity costs

question

A lawyer can argue a case in court for one hour and make $300. She could alternatively use that hour of time to type a legal brief in her office. What is the opportunity cost of her typing the legal brief? a.) nothing, since she would never type a legal brief b.) nothing, since she would always hire an administrative assistant to type for her c.) $300, since that is the amount she could have made by arguing a case in court d.) There is not enough information in this problem to be able to answer the question.

answer

c.) $300, since that is the amount she could have made by arguing a case in court

question

If the government of Spain decides to spend less on the military and more on health care, the forgone spending on military items represents the: a.) cost factor of the extra health care. b.) production efficiency of the extra health care. c.) opportunity cost of the extra health care. d.) allocative cost of the extra health care.

answer

c.) opportunity cost of the extra health care

question

United States Coffee 25 20 15 10 5 0 Tea 0 2 4 6 8 10 Japan Coffee 58 38 25 15 7 0 Tea 0 3 10 20 35 60 The table shows coffee and tea units produced for the United States and Japan. If Japan decides to increase production of tea from 20 units to 35 units, the opportunity cost is: a.) 15 units of tea. b.) 10 units of tea. c.) 8 units of coffee. d.) 10 units of coffee.

answer

c.) 8 units of coffee.

question

Which is NOT a source of economic growth? a.) increasing business investment b.) increasing research and development c.) reducing the level of international trade d.) reducing the variability of inflation

answer

c.) reducing the level of international trade

question

What would it mean if the PPF moved closer towards the origin? a.) increasing the labor force b.) improving the skills of the workers c.) increasing government regulation on businesses overall d.) increasing the population

answer

c.) increasing government regulation on businesses overall

question

Investment in human capital refers to: a.) education, on-the-job training, and professional training activities. b.) increasing the machinery and equipment firms use. c.) increasing the number of people working at companies. d.) increasing the financial capital in the economy.

answer

a.) education, on-the-job training, and professional training activities

question

The theory of comparative advantage says that countries: a.) should restrict trade by cutting off all imports. b.) should import those goods they can produce at a lower opportunity cost than another country. c.) can never benefit from specialization in trade. d.) should export those goods they can produce at a lower opportunity cost than another country.

answer

d.) should export those goods they can produce at a lower opportunity cost than another country

question

Paolo can walk three dogs or mow two lawns in two hours. Ashanti can walk six dogs or mow three lawns in two hours. Ashanti's opportunity cost for each additional dog walked is: a.) 0.5 lawns mowed. b.) 1.5 lawns mowed. c.) 2.0 lawns mowed. d.) 2.5 lawns mowed.

answer

a.) 0.5 lawns mowed

question

The limits on international trade include all the following, EXCEPT: a.) transportation and communication costs. b.) increasing opportunity costs and diminishing returns. c.) decreasing opportunity costs and increasing returns. d.) Trade may hurt some industries and individuals within each country.

answer

c.) decreasing opportunity costs and increasing returns

question

A market exists when: a.) an absolute advantage is achieved by one country. b.) people exchange money for goods and services. c.) the cost of production is equated to price by a government agency. d.) a physical location is created to facilitate the exchange of personal information about consumer choices.

answer

b.) people exchange money for goods and services

question

Which of the following would NOT be a market transaction? a.) payment for purchase of shares at a stock exchange b.) payment for a used book purchased on eBay c.) payment for a soft drink at a vending machine d.) payment made to a disaster victim

answer

d.) payment made to a disaster victim

question

At $20: Jim demands 1 item, Julianne demands 3 items, and Joan demands 6 items. The market quantity demanded at $20 is: a.) 1. b.) 10. c.) 3. d.) 6.

answer

b.) 10

question

Which of the following is an example of an inferior good? a.) gasoline b.) T-bone steak c.) city bus d.) clothing

answer

c.) city bus

question

The demand for gasoline is rising. Which of the following statements describes a possible cause? a.) Consumers expect prices to rise in the near future. b.) Commuters are switching from driving to public transportation. c.) Drivers are purchasing more fuel-efficient cars. d.) Incomes are falling.

answer

a.) Consumers expect prices to rise in the near future

question

What would cause a shift of the demand curve for honey to the right? a.) a decrease in the price of honey b.) a new virus that decimates the bee population c.) a new study that shows that honey cures cancer d.) a decrease in population

answer

c.) a new study that shows that honey cures cancer

question

Other factors held constant, as the price of an iPad rises, the: a.) demand for iPads falls. b.) quantity demanded for iPads falls. c.) demand for iPads rises. d.) quantity demanded for iPads rises.

answer

b.) quantity demanded for iPads falls

question

Supply is defined as: a.) the maximum amount of a product that buyers are willing and able to purchase over some time period at various prices, holding all other relevant factors constant. b.) the maximum amount of a product that sellers are willing and able to provide for sale over some time period at various prices, holding all other relevant factors constant. c.) the minimum amount of a product that buyers are willing and able to purchase over some time period at various prices, holding all other relevant factors constant. d.) the minimum amount of a product that sellers are willing and able to provide for sale over some time period at various prices, holding all other relevant factors constant.

answer

b.) the maximum amount of a product that sellers are willing and able to provide for sale over some time period at various prices, holding all other relevant factors constant

question

Which of the following leads to an increase in the quantity supplied of soccer balls? a.) an increase in the price of soccer balls b.) an improvement in the production technology of soccer balls c.) an increase in the number of manufacturers of soccer balls d.) an increase in taxes on the sale of soccer balls

answer

a.) an increase in the price of soccer balls

question

When quantity demanded in a market equals quantity supplied, then the: a.) market is in equilibrium. b.) equilibrium price is less than expected by buyers. c.) market will not clear without further price adjustments. d.) market is in temporary disequilibrium.

answer

a.) market is in equilibrium

question

At any price below the equilibrium price: a.) the quantity demanded equals the quantity supplied in the market. b.) the quantity demanded exceeds the quantity supplied in the market. c.) demand exceeds supply in the market. d.) the quantity demanded is less than the quantity supplied in the market.

answer

b.) the quantity demanded exceeds the quantity supplied in the market

question

A shift to the right of the supply curve could be caused by a(n): a.) improvement in production technology. b.) increase in the costs of resources. c.) increase in the price of a complement. d.) decrease in the number of sellers.

answer

a.) improvement in production technology.

question

Consumer surplus is defined as the: a.) gap between the demand curve and the market price. b.) gap between the supply curve and the market price. c.) difference between a price floor and the market price. d.)difference between a price ceiling and the market price.

answer

a.) gap between the demand curve and the market price.

question

Producer surplus is defined as the: a.) gap between the demand curve and the market price. b.) gap between the supply curve and the market price. c.) difference between a price floor and the market price. d.) difference between a price ceiling and the market price.

answer

b.) gap between the supply curve and the market price.

question

Suppose that a customer's willingness to pay for a product is $79, and the seller's willingness to sell is $64. If the negotiated price is $68, how much is consumer surplus? a.) $4 b.) $11 c.) $15 d.) $21

answer

b.) $11

question

Suppose that a customer's willingness to pay for a product is $79, and the seller's willingness to sell is $64. If the negotiated price is $68, how much is producer surplus? a.) $4 b.) $11 c.) $15 d.) $21

answer

a.) $4

question

Jonathan purchased coffee for $5 at Jennifer's coffee shop; however, he was willing to pay $9. Jennifer was willing to accept $3 for the coffee. The results of this transaction are a consumer surplus of: a.) $12 and a producer surplus of $10. b.) $10 and a producer surplus of $12. c.) $2 and a producer surplus of $4. d.) $4 and a producer surplus of $2.

answer

d.) $4 and a producer surplus of $2.

question

The measure of society's benefits due to a market transaction is called: a.) consumer surplus. b.) deadweight loss. c.) producer surplus. d.) total surplus.

answer

d.) total surplus.

question

Flu vaccination shots provide external benefits. Thus: a.) too many flu vaccination shots are given. b.) the private market provides the socially desirable output of shots. c.) the private market collapses. d.) too few flu vaccination shots are given.

answer

d.) too few flu vaccination shots are given.

question

When a scarce good or resource is consumed by the person who does not value it most, economists refer to the situation as: a.) the allocation of resources. b.) equity. c.) efficiency. d.) a misallocation of resources.

answer

d.) a misallocation of resources.

question

A good example of a government imposed price floor is: a.) rent controls. b.) supply and demand. c.) minimum wage. d.) equilibrium.

answer

c.) minimum wage.

question

A good example of a government imposed price ceiling is: a.) rent controls. b.) supply and demand. c.) minimum wage. d.) equilibrium.

answer

a.) rent controls.

question

Suppose a price floor is set on cane sugar that is approximately three times the equilibrium price. One of the effects is a(n): a.) drop in the quantity of sugar consumed. b.) increase in the efficiency of the market. c.) shortage of sugar. d.) shift by food manufacturers from the use of corn syrup to cane sugar.

answer

a.) drop in the quantity of sugar consumed.

question

"Price gouging" laws are types of _____ and often result in _____. a.) price ceilings; sufficient supply of a scarce good b.) price floors; sufficient supply of a scarce good c.) price ceilings; shortages of a scarce good d.) price floors; surpluses of a scarce good

answer

c.) price ceilings; shortages of a scarce good

question

What price would NOT allow for an effective price floor?

answer

Anything at or below the equilibrium price

question

deadweight loss

answer

The reduction in total surplus that results from the inefficiency of a market not in equilibrium.

question

Asymmetric information occurs when:

answer

one party to a transaction has significantly better information than another party.

question

price ceiling

answer

A government-set maximum price that can be charged for a product or service. When the price ceiling is set below equilibrium, it leads to shortages.

question

misallocation of resources occurs when :

answer

a good or service is not consumed by the person who values it the most, and typically results when a price ceiling creates an artificial shortage in the market.

question

price floor

answer

A government-set minimum price that can be charged for a product or service. When the price floor is set above equilibrium, it leads to surpluses.

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