Econ Chapter 2

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In a market system, scarce goods are allocated through the operation of

market prices that are determined by consumers and producers acting in their own self-interest

In a command economy, scarce goods are allocated by

a government-appointed planning board based on the board’s long-term priorities

The emergence of MP3 (or iPod) technology is an example of ‘creative destruction’ because

it has replaced compact discs as a technology used for the storage and transfer of music

The phrase ‘invisible hand’ means that

market prices provide information to consumers regarding products they wish to purchase and to producers regarding products they wish to produce

In the circular flow model (markets)

resource markets provide for the exchange of labor and product markets provide for the exchange of goods and services

In the circular flow model (goods and labor)

businesses sell goods and buy labor; households buy goods and sell labor

In the circular flow model, there is a flow

real goods and services and a flow of money

The three major legal forms of business enterprises are

sole proprietorship, partnership, and corporation

Which business enterprise is the most prevalent in terms of numbers?

Sole proprietorsips

Which (business enterprise) is the most dominant in terms of total sales revenues


What are the major forms of household income

Wages and salaries; corporate profits; proprietors’ income; interest income; rents

Wages and salaries are _____ profits (corporate and non-corporate profits combines)

three times more than

Durable consumer goods have an expected of _____ and non- durable consumer goods have an expected life of _____

3 years or longer; less than 3 years

The combined spending on both types of consumer goods is ______ than the total spending on services


Self interest helps achieve society’s economic goals because

as consumers and producers exercise their freedom to act int their own self-interest, markets will produce the desired goods at the lowest possible cost

There is a wide variety of desired goods and services in a market system because

individual wants are diverse

What is produced is ultimately determined by

consumers because if the goods offered are not what consumers want, consumers will not buy them

The market system depends on private property ownership and the protection of private property rights to

provide an incentive to maintain property and allow for the orderly transfer of property ownership

The use of capital in the production process

improves efficiency, increases output, and provides for growth

‘Division of labor’ means that workers

specialize in tasks that take advantage of their individual abilities and skills

When an economy relies on specialization

trade enables individuals to obtain the goods in which they do not have a specialization

Barter requires that you

find a person who has what you want and a person who needs what you have to offer

The use of money

provides a common value that makes buying and selling transactions simpler than would be the case with barter

Consider the statement ‘we want money only to part with it’. when people express a desire to ‘have money’ they really want

the goods and services that money can buy

Consider the following statement ‘the market system is a profit-and-loss system’ this statement is

true because producer decisions are motivated by the attempt to earn profits

Consider the follwoing statement ‘competition is the disciplinarian of the market economy’. this statement is

true because when producers face competition, they are driven to provide goods and services at the lowest possible cost

The operation of the market can explain the varied outcomes of these ‘dot-com’ companies because

shareholders experienced windfalls, creating profit expectations; new firms entered; prices fell; and some firms failed

Some large hardware stores such as Home Depot boast of carrying as many as 20000 different products in each store. this volume of goods is the result of

the choice of consumers regarding what to purchase to satisfy their wants and the choice of producers regarding what to produce to maximize profits

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