Macroeconomics - Ch 2

Question 0

Command system

Answer 0

Socialism/communism; gov’t owns most property resources & economic decision making occurs thru a central economic plan

Question 1

Economic system

Answer 1

Particular set of institutional arrangements and a coordinating mechanism to respond to the economizing problem

Question 2

Markets

Answer 2

Places where buyers (demanders) and sellers (suppliers) come together to buy & sell goods, services, & resources

Question 3

Market system

Answer 3

Capitalism; private ownership of resources and the use of markets and prices to coordinate and direct economic activity; participants act in own self-interest; *Efficiency, incentives, freedom

Question 4

Pure/laissez-faire capitalism

Answer 4

Gov’ts role limited to protecting property & establishing an environment appropriate to the operation of the market system; laissez-faire = “let it be” (keep gov’t from interfering with the economy

Question 5

Private property

Answer 5

Coupled with freedom to negotiate binding legal contracts, enables individuals & businesses to obtain, use, & dispose of property resources as they see fit

Question 6

Freedom of enterprise

Answer 6

Ensures that entrepreneurs and private biz are free to obtain and use economic resources to produce their choice of goods & services and to sell them in their chosen markets

Question 7

Freedom of choice

Answer 7

Enables owners to employ or dispose of their property and money as they see fit; allows workers to try to enter any line of work for which they are qualified; ensures consumers are free to buy goods/services that best satisfy their wants & that their budget allows

Question 8

Self-interest

Answer 8

Motivating force of the various economic units as they express their free choices; each Econ unit to achieve its own particular goal, which usually requires delivering something of value to others

Question 9

Competition

Answer 9

Requires 2+ buyers & 2+ sellers acting independently in a particular product or resource market & freedom of sellers & buyers to enter/leave markets on the basis of their Econ self-interest; = regulatory mechanism of market system

Question 10

Specialization

Answer 10

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

Question 11

Division of labor

Answer 11

human specialization; makes use of differences in ability; fosters learning by doing; saves time

Question 12

Medium of exchange

Answer 12

usually = money; makes trade easier; convenient social invention to facilitate exchanges of goods and services

Question 13

Barter

Answer 13

Swapping goods for goods; poses serious problems b/c it requires a “coincidence of wants” between the buyer and the seller

Question 14

Profits/losses

Answer 14

the difference between the total revenue (TR) a firm receives from the sale of its products and the total cost (TC) of producing those products

Question 15

Consumer sovereignty

Answer 15

crucial in determining the types and quantities of goods produced; consumers spend their income on the goods they are most willing and able to buy (“dollar votes”)

Question 16

Least cost production

Answer 16

Firms must employ the most economically efficient technique of production in producing their output

Question 17

Creative destruction

Answer 17

the creation of new products and production methods completely destroys the market positions of firms that are wedded to existing products and older ways of doing business

Question 18

“Invisible Hand”

Answer 18

Adam Smith (The Wealth of Nations, 1776),: operation of a market system creates a curious unity between private interests and social interests; firms and resource suppliers, seeking to further their own self-interest and operating within the framework of a highly competitive market system will simultaneously promote the public or social interest

Question 19

Demise of the command system

Answer 19

Problem with coordination and incentive

Question 20

Circular Flow Diagram

Answer 20

Flows for a simplified economy where there is no government; resources flow from households to businesses; products flow from businesses to households; monetary flows opposite directions –> households receive incomes from businesses though resource market, businesses receive revenue from households through product market

Question 21

Households

Answer 21

one or more persons occupying a household unit; ~ 116 million in US

Question 22

Businesses

Answer 22

Commercial establishments that attempt to earn profits for their owners by offering goods and services for sale; 3 categories (sole proprietorship, partnership, corporation)

Question 23

Sole proprietorship

Answer 23

Business owned and managed by a single person

Question 24

Partnership

Answer 24

2+ individuals agree to own and operate a business together; pool resources and share profits/losses

Question 25

Corporation

Answer 25

independent legal entity that can, on its own behalf, acquire resources, own assets, produce/sell products, incur debts, extend credit, sue and be sued, and otherwise engage in any legal business activity

Question 26

Product Market

Answer 26

place where the goods and services produced by businesses are bought and sold

Question 27

Resource Market

Answer 27

Households sell resources to businesses