CH 2: The Market System and the Circular Flow

LO2.1
Which of the following is determined by an economic system?

- What goods are produced

The term "laissez-faire" refers to

- allowing businesspeople to make all their own decisions without

government interference
Who owns most property resources in a command system?
- Government

Which of the following is true of a market system?

- A market system is a combination of centralized government initiatives
and decentralized actions taken by firms.
Private individuals and businesses are able to utilize property as they wish
as a result of:
- the ability to negotiate legally binding contracts.
- the legal right to private property.
Which are major decisions that must be addressed by an economic
system?
- Who gets the goods that are produced
- Which goods are produced
- How to promote technological progress
Which of the following describe the concept of laissez-faire?
- A market system in which only mutually beneficial economic
transactions are completed
- A market system in which the role of government is limited to
protecting private property
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?
- Freedom of enterprise
Choose those characteristics that best describe a command system.
- A central planning board makes all economic decisions concerning
resources.
- The government owns most property resources.

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
-self-interest
 Which of the following is characterized by the private ownership of
resources and the use of markets to coordinate and direct economic
activity?
- Market system

______ ownership of capital gives capitalism its name.

- Private…

Which of the following is determined by an economic system?

- What goods are produced

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
- competition

Freedom of enterprise ensures that entrepreneurs and private businesses are

free to obtain and use economic resources to produce their choice of goods and
services
- enterprise
Under the market system, ______ coordinate the decisions made by households and
businesses.
- markets and prices
In a ______ system, people act in their own self-interest.
- Market

Which of the following correctly state the importance of advanced

technology and capital goods? (Check all that apply.)
- The new technology can enhance the productivity of workers.
- The most direct methods of producing a good or service are often the
least efficient.
Which of the following is true of a market system?
- A market system is a combination of centralized government initiatives
and decentralized actions taken by firms.
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.
- Specialization

Private individuals and businesses are able to utilize property as they wish
as a result of:
- the legal right to private property.
- the ability to negotiate legally binding contracts.

Money complicates exchange or trade.

- FALSE: money facilitates trade which results from specialization
Competition
- Two or more buyers and two or more sellers acting independently in a
particular market
- Freedom of sellers and buyers to enter or leave markets
What is the coordinating mechanism in a market system?
- Price

Modern market economies usually have a(n)

- active, but limited, government

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

- Using a combination of labor, capital, and technology

The five questions that every society must address reflect the constraints
that scarce resources impose on a world of unlimited wants.

Specialization

- 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.

In a market system, consumers exercise consumer sovereignty, which is

crucial in determining the types and quantities of goods produced

- True

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

- Medium of exchange
Goods and services are produced efficiently when production is organized in
combinations and ways

- That minimize the cost per unit of output

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

- Competition

In a market economy, goods and services are distributed

- to consumers on the basis of their ability and willingness to pay the

existing market price

If increasing numbers of consumers decide to purchase organically farmed

fruit rather than conventionally farmed fruit, how is the market likely to
respond?
- Organic fruit profits will rise.
- Conventional fruit profits will fall.
Identify the five fundamental questions that all economies, whether market
or command, must address.
- How will the system promote technological progress?
- How will the system accommodate change?
- What goods and services will be produced?
- How will the goods and services be produced?
- Who will get the goods and services?
Which of the following collectively direct resources to industries that are
meeting consumer wants and away from industries that are not meeting
consumer wants? (Check all that apply.)
- Dollar votes (consumer registering their wants in the market by
buying)
- Consumer sovereignty

Which of the following best describe how goods and services should be
produced?
- By utilizing the right mix of labor and capital
- By locating production facilities optimally to hold down production and
transportation expenses
Which of the following statements describe who will get the goods and
services produced in a market economy?
 - Those who have sufficient income and want to spend money on a
particular good
- Those who are willing and able to pay for the goods and services
In recent years, new MP3 and digital technologies have replaced compact
disks. This is an example of _____.
- creative destruction
o Creative destruction is the proper term for 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.
Which of the following would be an example of the system accommodating
change?
- Buyers want more juice and less milk. Producers increase spending
only on juice.
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 ______.
- an invisible hand
o The notion of the "invisible hand" asserts that businesses seek to
build new and improved products to increase profits. In doing so,
those enhanced products increase society's well-being.

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

True or false: In a market system, consumers exercise consumer

sovereignty, which is crucial in determining the types and quantities of goods
produced.
- True
In the circular flow model, the market economy creates
- continuous flows of goods and services, resources, and money

Goods and services are produced efficiently when production is organized in

combinations and ways
- that minimize the cost per unit of output
In the circular flow model, households Blank______ resources
and Blank______ products.
- Sell; buy
The "invisible hand" guides firms and resource suppliers to
promote Blank______ even as they seek to further their own interests.
- Public and social interests
The function of firms in the circular flow model is to Blank______ resources
and Blank______ products.
- Purchase ; sell
Which of the following are components of the circular flow model?

- Resource market
- Product market
- Businesses
- Households

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

- Businesses

In the circular flow model ______.

- households spend their income in the product market
o Reason: Households supply their labor as resources to firms.
True or false: The resource market is the place where resources or the
services of households are produced.
- FALSE: The resource market is the place where resources or the
services of resource suppliers are bought and sold.
How does the market system develop methods for analyzing and managing
risk?
- By presenting businesses with the economic consequences of their
decisions
How does the profit system guide entrepreneurs?
- By rewarding them with profits when they choose wisely
- By punishing them with losses when they choose poorly
The product market is the place where
- businesses sell goods and services and households buy goods and
services
Which of the following occur in the resource market?
 -Businesses buy resources from households because they are
necessary for producing goods and services.
 Households provide economic resources directly as workers or
entrepreneurs.
 Households sell resources and businesses buy them.

For a market system to maximize its potential, it must develop methods for
- assessing and managing risk
The two major benefits that arise from the market system's restriction of
business risk to owners and investors are
- attracting inputs and focusing attention.

Which statements about the profit system are true?

- It is actually a profit and loss system.
- It encourages entrepreneurs to make prudent decisions.
A firm's owners are called Blank______ because they are only paid after
employees, suppliers, and lenders have been paid.
- Residual claimants

True or false: The resource market is the place where resources or the
services of households are produced.
- False: The resource market is the place where resources or the
services of resource suppliers are bought and sold.
The market system attracts inputs and focuses owners' attention on risk
management by restricting business risk to which two groups?

- Owners
- Investors

How does the profit system guide entrepreneurs?

- By punishing them with losses when they choose poorly
- By rewarding them with profits when they choose wisely

Which of the following occur in the resource market?

- Businesses buy resources from households because they are
necessary for producing goods and services.
- Households provide economic resources directly as workers or
entrepreneurs.
- Households sell resources and businesses buy them.