Chapter 2 The Three Basic Economic Problem

Question 1

What are private property rights ?

Answer 1

The exclusive right to use, to receive income generated by the use of good and the right to transfer the good.

Question 2

Why are private property rights important in a market economy ?

Answer 2

If private property rights are not well-defined, the good or resources becomes a common property and no one would be willing to pay for its use. As a result, exchange would not take place and people may overuse the good or resources.

Question 3

Suggest how tradition economy solve the problems of resource allocation.

Answer 3

By customs and traditions

Question 4

Suggest how market economy solve the problems of resource allocation

Answer 4

By price mechanism or market mechanism

Question 5

Give two features of market economy.

Answer 5

1. Most resources are owned by private individuals
2. There is existence of private property rights
3. Individuals are free to make production and consumption decisions

Question 6

Give two features of planned(command) economy.

Answer 6

1. Most productive resources are owned and controlled by the government
2. There is the lack of private property rights system
3. The government makes all decisions on the problems of resource allocation

Question 7

State how planned(command) economy solve the problems of resource allocation.

Answer 7

Decide by the government or central planning

Question 8

Suggest how people in traditional economy solve the problem of how to produce.

Answer 8

People use the same methods of production as their previous generations

Question 9

Suggest how people in traditional economy solve the problem of what to produce.

Answer 9

People follow what theit previous generations have done

Question 10

Suggest how people in traditional economy solve the problem of for whom to produce.

Answer 10

Determine by the customs and traditions

Question 11

Suggest how people in market economy solve the problem of what to produce.

Answer 11

Based on consumers’ preferences

Question 12

Suggest how people in market economy solve the problem of how to produce.

Answer 12

Producers tend to minimize the total cost of production

Question 13

Suggest how people in market economy solve the problem of for whom to produce.

Answer 13

Goods are distributed to those who are willing and able to pay the market price

Question 14

Suggest how people in planned(command) economy solve the problem of what to produce.

Answer 14

The government draws up its production plan.

Question 15

Suggest how people in planned(command) economy solve the problem of how to produce.

Answer 15

The government decides on the method of production

Question 16

Suggest how people in planned(command) economy solve the problem of for whom to produce.

Answer 16

The government determines how goods are distributed and who are entitled to get the goods

Question 17

Comment on this statement : “ Scarcity implies competition. “

Answer 17

Incorrect, in one-man society, there is scarcity but no competition.