Free Market Model

Question 1

List the characteristics of a free-market economy.

Answer 1

Interdependent relationship between individuals and business firms;
Production depends on preferences of individuals with ability to pay for goods and services;
Production depends on availability of economic resources, level of technology, and how business firms choose to use them;
Production depends on sale price being at least equal to production cost.

Question 2

Describe the relationship between economic resources and compensation in a free-market economy.

Answer 2

Business firms acquire economic resources from individuals (labor, capital and natural resources), who receive compensation in return (wages/salaries, rents, interest, dividends, etc.); individuals use this compensation to acquire goods and services produced by businesses

Question 3

List the types of economic resources.

Answer 3

Acquired from individuals as:
Labor: human work, skills, and similar human effort;
Capital: financial resources (e.g., savings) and man-made resources;
Natural Resources: land, minerals, timber, water, etc.

Question 4

In an economic context, what makes up compensation?

Answer 4

Wages, salaries and profit sharing for labor;
Interest, dividends, rental and lease payments for capital;
Rental, lease and royalty payments for natural resources.

Question 5

What determines “price”?

Answer 5

The supply of and demand for the commodity being priced.