Chapter 3 Global Economic System.

Question 1

3 basic economic questions that every country must answer

Answer 1

What to produce?
How to produce?
And who benefits?

Question 2

Economic system

Answer 2

Is a method of answering the three economics questions.

Question 3

What are the two primary economic systems in use today?

Answer 3

Capitalism and socialism.

No country is hundred percent of either.

Question 4

Mixed economy

Answer 4

Having features of socialism and capitalism.

Question 5

Capitalism requires

Answer 5

Private ownership of capital.
Market allocation
Self interest motivation

Question 6

How are the questions in capitalism answered?

Answer 6

By the use of markets.

In capitalism, self interest is the guiding motivation.

Question 7

Socialism

Answer 7

Socialism relies on government ownership of capital, planning as the allocation mechanism instead of markets and social interest motivations.
Government ownership of capital
planned allocation
social interest motivations

Question 8

Markets are

Answer 8

Voluntary

Question 9

Markets provides

Answer 9

Incentives to both buyers and sellers because they can gain from exchange.

Question 10

Markets also promote

Answer 10

Efficiency and innovation by businesses trying to maximize their profits.

Question 11

Why do markets provide efficiency to workers?

Answer 11

Workers have an incentive to be efficient, because their compensation should be based on their production.

Question 12

Decision making in capitalism is

Answer 12

Decentralized.

In a planned economy, a government agency makes all the decisions.

Question 13

Why do incentives in a planned economy differ from those in capitalism?

Answer 13

Since the society, not the individual, stands to gain from individual efforts.

Question 14

Why do markets fail?

Answer 14

Because of several factors notably public goods , externalities, Asymmetric information and monopoly power.

Question 15

Public goods

Answer 15

Are non-exclusive and nonrivalous.

They are under produced by markets because people can free ride.

Question 16

Externalities

Answer 16

Occur when transaction brings cost or benefits to someone other than those directly involved in the transaction.

Question 17

Externalities can be either

Answer 17

Positive or negative and can result in either over or under production of a good.

Question 18

Asymmetric information

Answer 18

Occurs when either the buyer or the seller knows important information about an exchange that the other does not.

Question 19

Asymmetric information can result in

Answer 19

Goods being wrongly prized or withdrawn from the market.

Question 20

Monopoly power

Answer 20

Exist when markets are insufficiently competitive.

It may result in higher prices and inefficiency.

Question 21

Monopsony

Answer 21

Exist when there is one buyer of a good, it allows the monopsonist to influence prices paid.

Question 22

Private ownership

Answer 22

• focuses on financial returns
• provides communication for profit
• serves only those who fall within their target market
• can easily change their course in order to appeal to a different market (example: radio station that used to play all news now only plays golden oldies)

Question 23

Market economy

Answer 23

-economic system in which demand, supply, and the price system help people make desicions; free enterprise economy

Question 24

Self interest

Answer 24

-People and businesses do what do what they think is best for themselves, to be motivated by their own interest.

Question 25

Planning

Answer 25

Planned systems are sometimes called command economies as economic activity is at the command of the government.

Question 26

Social interest

Answer 26

-Demand that people do what is best for society not what is best for themselves as individuals.

Question 27

Incentives

Answer 27

-encourage the right behavior from buyers and sellers.

Question 28

Public goods

Answer 28

-is both nonrivalous and non exclusive. Example army navy

Question 29

Exclusive

Answer 29

-you must pay to get them.

Question 30

Rivalrous

Answer 30

-once consumed by anyone, it cannot be consumed by others.

Question 31

Free rider

Answer 31

-Preferring to contribute nothing and allow others to pay for a resource form which you benefit

Question 32

Moral hazard

Answer 32

-occurs when individuals or firms that are protected against some kind of loss act with less caution than they would have otherwise, thereby making a bad outcome

Question 33

Adverse selection

Answer 33

-Occurs when individuals use private info to sort themselves into or out of a market transaction

Question 34

Signaling

Answer 34

Occurs When the buyer or seller sends additional information or provides some form of assurance that are goods being bought or sold is as advertised.