Chapter 2

Question 1

Traditional Economy

Answer 1

the allocation of scarce resources, and nearly all other economic activity

Question 2

Advantage of a Traditional Economy

Answer 2

everyone knows which role to play

Question 3

Disadvantage of a Traditional Economy

Answer 3

tends to discourage new ideas and new ways of thinking

Question 4

Command Economy

Answer 4

a central authority makes most of the WHAT, HOW, FOR WHOM decisions

Question 5

Advantages of a Command Economy (2)

Answer 5

• change direction drastically in a relatively short time

- many health and public services are avialable to everyone at little to no cost, regardless of income

Question 6

Disadvantages of a Command Economy (5)

Answer 6

• doesn’t meet needs and wants of consumers
• doesn’t give people the incentive to work hard
• only requires a large decision-making bureaucracy
• doesn’t have flexibility to deal with minor problems
• new ideas discouraged

Question 7

Market Economy

Answer 7

people and firms act in their own best interests to answer the WHAT, HOW, FOR WHOM questions

Question 8

Advantages of a Market Economy (6)

Answer 8

• able to adjust to change gradually
• individual freedom
• lack of gov’t interference
• decentralized decision making
• variety of goods and services available
• high degree of consumer satisfaction

Question 9

Disadvantages of a Market Economy (4)

Answer 9

• rewards only productive resources
• doesn’t produce enough public goods
• workers and businesses face uncertainty as a result of competition and change
• must guard against market failures

Question 10

Social Security

Answer 10

a federal program of disability and retirement benefits that covers most working people

Question 11

inflation

Answer 11

a rise in the general level prices

Question 12

fixed income

Answer 12

an income that doesn’t increase even though prices go up

Question 13

Capitalism

Answer 13

private citizens, many of who are entrepreneurs, own the factors of production

Question 14

Free Enterprise

Answer 14

competition is allowed to flourish with minimal gov’t interference

Question 15

Voluntary Exchange

Answer 15

the acts of buyers and sellers freely and willingly engaging in market transactions

Question 16

Private Property Rights

Answer 16

privilege that entitles people to own and control their possessions as they wish

Question 17

Profit Motive

Answer 17

the driving force that encourages people and organizations to improve their material well being

Question 18

Competition

Answer 18

the struggle among sellers to attract consumers while lowering costs

Question 19

Roles of Entrepreneurs (4)

Answer 19

• organize and manage land, capital, and labor
• start up new businesses
• the spark plug and the catalyst of the free enterprise economy
• attract other firms to the industry

Question 20

Role of the Consumer

Answer 20

determine which products are ultimately produced

Question 21

consumer sovereignty

Answer 21

role of consumer as ruler of the market when determining what types of goods and services are produced

Question 22

Roles of the Government (4)

Answer 22

• Protector
• Provider and Consumer
• Regulator
• Promoter of National Goals

Question 23

The Government as a Protector (3)

Answer 23

• enforce laws
• protect property rights
• enforce contracts

Question 24

The Government as a Provider and Consumer (3)

Answer 24

• supplies defense services
• provide education and public welfare
• consume factors of production

Question 25

The Government as a Regulator (2)

Answer 25

• preserving competition in the market place

- oversees interstate commerce, communications, and entire industries

Question 26

mixed economy

Answer 26

people carry on their economic affairs freely, but are subject to some government intervention and regulation