Ch 2 - The Market System and the Circular Flow

Question 1

economic system

Answer 1

A particular set of institutional arrangements ad a coordinating mechanism for producing goods and services

Question 2

command system

Answer 2

An economic system in which most property resources are owned by the government and economic decisions are made by a central government body

Question 3

market system

Answer 3

economic system in which property resources are privately owned and markets and prices are used to direct and coordinate economic activities

Question 4

private property

Answer 4

the right of persons and firms to obtain, own, control, employ, dispose of, and bequeath land, capital, and other property

Question 5

The most important consequence of property rights is that they encourage people to cooperate by helping to ensure that only ____ ____ economic transactions take place

Answer 5

mutually agreeable

Question 6

freedom of enterprise

Answer 6

the freedom of firms to obtain economic resources, to use those resources to produce products of the firm’s choosing, and to sell their products in markets of their choice

Question 7

freedom of choice

Answer 7

freedom of owners of resources to employ or dispose of their resources as they see fit, and the freedom of consumers to spend their incomes in a manner they think is appropriate

Question 8

self-interest

Answer 8

the most-advantageous outcome as viewed by each firm, property owner, worker, or consumer

Question 9

competition

Answer 9

the presence in a market of independent buyers and sellers vying with one another, and the freedom of buyers and sellers to enter and leave the market

Question 10

market

Answer 10

an institution or mechanism that brings buyers (“demanders”) and sellers (“suppliers”) together

Question 11

specialization

Answer 11

the use of resources of an individual, region, or nation to produce one or a few goods and services rather than the entire range of goods and services

Question 12

division of labor

Answer 12

separation of the work required to produce a product into a number of different tasks that are performed by different workers

Question 13

division of labor’s contribution to society’s output

Answer 13

1. make use of differences in ability
2. fosters learning by doing
3. saves time

Question 14

medium of exchange

Answer 14

any item sellers generally accept and buyers generally use to pay for goods and services

Question 15

barter

Answer 15

exchange of one good or service for another good or service

Question 16

money

Answer 16

any item that is generally acceptable to sellers in exchange for goods and services

Question 17

characteristics of market system

Answer 17

1. private property
2. freedom of enterprise and choice
3. self-interest
4. competition
5. markets and prices
6. technology and capital goods
7. specialization
8. use of money
9. active, but limited government

Question 18

consumer sovereignty

Answer 18

determination by consumers of the types and quantities of goods and services that will be produced with the economy’s scarce resources

Question 19

dollar votes

Answer 19

the “votes” that consumers and entrepreneurs cast for the production of consumer and capital goods when they purchase them in product and resource markets

Question 20

creative destruction

Answer 20

idea that the creation of new products and production methods may simultaneously destroy the market power of existing firms

Question 21

“invisible hand”

Answer 21

the tendency of firms and resource suppliers that are seeking to further their own self-interest in competitive markets to also promote the interest of society as a whole

Question 22

circular flow diagram

Answer 22

the flow of resources from households to firms and of products from firms to households

Question 23

households

Answer 23

one or more persons occupying a housing unit that provide resources to the economy and use income received to purchase goods and services that satisfy economic wants

Question 24

businesses

Answer 24

firms that purchase resources and provide goods and services to the economy

Question 25

product market

Answer 25

a market in which goods and services (products) are sold by firms and bought by households

Question 26

resource market

Answer 26

a market in which households sell and firms buy economic resources

Question 27

sole proprietorship

Answer 27

business owned and operated by one person

Question 28

partnership

Answer 28

2 or more individuals (partners) agree to own and operate a business together

Question 29

corporation

Answer 29

a legal creation that can acquire resources, own asses, produce and sell products, incur debts, extend credit, sue and be sued, and perform the functions of any other type of enterprise

Question 30

nation’s (US) earned income is apportioned among ___, ___,___, and ___

Answer 30

wages, rents, interest, and profits

Question 31

wages

Answer 31

paid to labor

Question 32

rents and interest

Answer 32

paid to owners of property resources

Question 33

profits

Answer 33

paid to owners of corporations and unincorporated businesses

Question 34

3 broad categories of goods and services within households

Answer 34

1. consumer durables (goods w/ expected lives of 3 years or longer)
2. nondurables (goods w/ expected lives of 3 years or less)
3. services (work done by people like lawyers and physicians)

Question 35

United States is known as a ____-____ ____ because ________________________

Answer 35

service-oriented economy; approximately 65% of consumer spending is on services