Chaper 2

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The two general types of economic systems that exist today are:

market systems and command systems

Which of the following is a distinguishing feature of a command system

central planning

Which of the following is a distinguishing feature of a market system

wide-spread ownership of capital

Examples of command economies are

Cuba and North Korea

Of the following countries, the one that best exhibits the characteristics of a market economy is:


The French term laissez-faire means

let it be

An economic system

is a particular set of institutional arrangements and a coordinating mechanism used to respond to the economizing problem

The term laissez-faire suggests that:

government should not interfere with the operation of the economy

Economic Scarcity

applies to all economies

Economic systems differ according to what two main characteristics

Who owns the factors of production, and the methods used to coordinate economic activity

Which of the following is NOT a characteristic of the market system?

Government ownership of the major industries

Which of the following is a fundamental characteristic of the market system?

Property rights

Copyrights and Trademarks are examples of:

Property Rights

The pursuit of self-interest:

gives direction to the market system

The regulatory mechanism of the market system is:


Broadly defined, competition involves:

independently acting buyers and sellers and freedom to enter or leave markets

Competition means that:

there are independently-acting buyers and sellers in each market

Well-defined property rights:

encourage owners to maintain or improve their property

The division of labor means that:

workers specialize in various production tasks

Specialization in production is important primarily because it:

results in greater total output.

Specialization–the division of labor–enhances productivity and efficiency by:

all of the above means

Specialization in production is economically beneficial primarily because it:

permits the production of a larger output with fixed amounts of resources.


entails the exchange of goods for goods.

The coincidence-of-wants problem associated with barter refers to the fact that:

for exchange to occur each seller must have a product that some buyer wants.

The use of money contributes to economic efficiency because:

it promotes specialization by overcoming the problems with barter.

Which of the following is one of the Five Fundamental Questions?

What goods and services will be produced?

Which of the following is NOT an economic cost?

economic profits.

If competitive industry Z is making substantial economic profit, output will:

expand in industry Z, as more resources will move to that industry.

From society’s point of view the economic function of profits and losses is to:

reallocate resources from less desired to more desired uses.

In a market economy a significant change in consumers’ desire for product X will:

do all of the above

Economic profits in an industry suggest the industry:

should be larger to better satisfy consumers’ desire for the product.

Economic profits and losses:

are essential to the reallocation of resources from less desired goods to more desired goods.

If consumer desire for product X increases, all of the following will occur except:

a decrease in the quantity of resources employed in industry X.

An increase in consumer desire for strawberries is most likely to:

increase the number of strawberry pickers needed by farmers

If competitive industry Y is incurring substantial losses, output will:

contract as resources move away from industry Y.

The economic function of profits and losses is to:

signal that resources should be reallocated

In a competitive economy prices:

do all of the above

If a competitive industry is neither expanding nor contracting, we would expect:

economic profits to be zero

Suppose industry A is realizing substantial economic profit. Which of the following best describes what will happen in this competitive market?

Firms will enter the industry and output will rise

The competitive market system:

encourages innovation because successful innovators are rewarded with economic profits

In a market economy the distribution of output will be determined primarily by:

the quantities and prices of the resources that households supply.

The most efficient combination of resources in producing any output is the combination that:

can be obtained for the smallest money outlay

In a competitive market economy firms will select the least-cost production technique because:

to do so will maximize the firms profits

The market system’s answer to the fundamental question "What will be produced?" is essentially:

"Goods and services that are profitable."

The market system’s answer to the fundamental question "How will the goods and services be produced?" is essentially:

"At least-cost production."

The market system’s answer to the fundamental question "Who will get the goods and services?" is essentially:

"Those willing and able to pay for them."

The market system’s answer to the fundamental question "how will the system accommodate change?" is essentially:

"Through the guiding function of prices and the incentive function of profits"

The market system’s answer to the fundamental question "How will the system promote progress?" is essentially:

"Through the profit potential that encourages development of new technology."

The advent of DVDs threatens to eventually demolish the market for videocassettes. This is an example of:

creative destruction

Consumer sovereignty refers to the

idea that the decisions of producers and resource suppliers with respect to the kinds and amounts of good produced must be appropriate to consumer demands.

The dollar votes of consumers ultimately determine the composition of output and the allocation of resources in a market economy. This statement best describes the concept of:

consumer sovereignty

Which of the following best describes the invisible-hand concept?

the desires of resource suppliers and producers to further their own self-interest will automatically further the public interest.

The invisible hand refers to the:

notion that, under competition, decisions motivated by self-interest promote the social interest.

The invisible-hand concept suggests that:

assuming competition, private and public interest will coincide.

The invisible-hand concept suggests that:

when firms maximize their profits, society’s output will also be maximized.

Two major virtues of the market system are that it:

allocates resources efficiently and allows economic freedom.

The market system:

effectively harnesses the incentives of workers and entrepreneurs.

The coordination problem in the centrally planned economies refers to the idea that:

planners had to direct required inputs to each enterprise

"Under central planning, some group has to decide how to get the necessary inputs produced in the right amounts and delivered to the right places at the right time. This is a nearly impossible task without markets and profits." This quotation best identifies the:

coordination problem under central planning

"Because the outputs of many industries are the inputs to other industries, the failure of any single industry to fulfill the output qualities specified in the central plan caused a chain-reaction of adverse repercussions on production." This quotation best identifies the:

coordination problem under Central planning.

The incentive problem under communist central planning refers to the idea that:

workers, managers, and entrepreneurs could not personally gain by responding to shortages or surpluses or by introducing new and improved products.

Suppose that an individual sees a tremendous opportunity to produce and sell a new product, but dismisses the idea because there is no way to exploit this opportunity for personal gain. This situation best identifies the:

ncentive problem under communist central planning.

Shortages and unmet demand provide opportunities for individuals and firms to profit under capitalism, but they present no such opportunities under central planning. This reality represents central planning’s:

incentive problem

Innovation lagged in the centrally planned economies because:

enterprises resisted innovation in fear that their production targets would be raised.

The fact that the major indicator of enterprise success in the Soviet Union and pre-reform China was the quantity of output implied that:

product quality was neglected.

Enterprise managers and workers in the Soviet Union often resisted innovations in production methods because:

production targets were often increased when innovation occurred.

The failure of Soviet central planning was reflected in:

all of the above.

if products were in short or surplus supply in the Soviet Union:

producers would not react because no price or profit signals occurred.

In terms of circular flow diagram, businesses obtain revenue through the____market and make expenditures in the____market.

product; resource

Households and businesses are:

sellers in the resource and product markets respectively.

In the circular flow model

households sell resources to firms

In 1975 McDonald’s introduced its Egg McMuffin breakfast sandwich, which remains popular and profitable today. This longevity illustrates the idea of:

consumer sovereignty

In 1996 McDonald’s introduced its Arch Deluxe hamburger, which failed to catch on with the public and was subsequently dropped from the menu. This failure illustrates the idea of:

consumer sovereignty

In Class Abell was talking about some of the problems with the Command System, he went on to compare two countries…who were they?

United States, Soviet Union

In reference to the Cold War, Abell compared the two countries engaged to what?

Two bullies on a playground

Abell was talking about the shortcomings of the Soviet Union, one of the issues was the bottlenecking of certain goods…what was the product that was in shortage to the point there was a black market for it?

16 penny nails

When talking about the Cold War, there were two countries that were competing for the air-speed record, what was the name of the plane that actually won that battle?


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