Deck 2: Part A: The Market System and the Circular Flow

Question 1

Explain why the market system is an organizing mechanism.

Answer 1

Markets and price give the economic system its ability to coordinate millions of economics decisions made on a daily basis.The system is an extensive communication network for expressing the wishes of consumers to producers.The price signals given by markets direct resources to the goods and services people want and indicate where profits are to be made for producers.Producers who fail to heed the market signals are punished.Consumers also use the market price to figure out how to make the best use of their limited incomes.

Question 2

What is the importance of competition in relation to self-interest in a market system?

Answer 2

Competition is important as the force, which tempers or regulates the self-interest of producers, sellers, workers, and buyers.If producers make too much profit, competitors will arise to take advantage of the opportunity and as production increases, prices and profits will fall.If workers demand too much, employers will seek other workers who are willing to work for less.If buyers are not willing to pay a fair price for the product, producers will sell the product to someone who is.In each case it is competition or the threat of competition that tempers the potential abuse of economic power.

Question 3

Describe two types of specialization in production.

Answer 3

Specialization may be of the human form with division of labour where different workers perform different production tasks; or it may be geographic specialization where some goods and services are produced in certain regions and others are produced in other areas.

Question 4

Explain what is meant by a command economy.

Question 5

Explain the most important consequence of legally enforceable property rights?

Question 6

Why is the right of private property an essential characteristic of a market system?

Question 7

What roles do freedom of enterprise and freedom of choice play in capitalism? How important are they to the operation of a competitive market economy?

Question 8

How does the use of money differ from the use of barter in the exchange of goods and services?

Question 9

What conditions are necessary for economic competition to exist?

Question 10

Describe three ways that the division of labour contributes to society's output.

Question 11

Suppose Tom, Dick, and Harry live in a barter economy.Tom produces wine, Dick bakes bread, and Harry makes cheese.Tom wants some bread to go with his wine and is willing to trade 1 litre of wine for two loaves of bread.Dick wants some cheese to go with his bread and is willing to trade one loaf of bread for one-half kilogram of cheese.Harry doesn't want bread, but wants some wine to go with his cheese and is willing to trade cheese for one litre of wine.It is not possible for all three of them to meet together at one time.(a) Explain how this situation illustrates the difficulty with a barter economy.(b) Devise a money system using rubies where four rubies are equivalent in value to one litre of wine.In other words tell how much bread and cheese would be worth in terms of rubies in this economy.In this system, how much cheese must Harry sell in order to buy one litre of wine?

Question 12

Describe all the advantages a money economy has over a barter economy?

Question 13

Why does specialization require a convenient means of exchanging goods?

Question 14

List nine characteristics of the market system.

Question 15

Explain the importance of self-interest in the operation of a market system.

Question 16

Explain the term "laissez-faire capitalism.

Question 17

What are the economic advantages of the division of labour?

Question 18

Respond to the following question: "Producing capital goods takes time, so how can that be a more efficient form of production of consumer goods?"

Question 19

One of the characteristics of a modern market economy is an "active, but limited, government." How can the government "help" the economy?

Question 20

What is money and what important function does it perform? Explain how it overcomes the disadvantages associated with barter.What conditions are necessary for people to accept paper currency in exchange for the goods and services, which they sell?

Question 21

Assume that a firm finds that its profits will be maximized (or losses minimized) when it produces $50 worth of product X.Each of these techniques shown in the following table will produce exactly $50 worth of X. (a) Which method is most efficient? Why?
(b) Given the above prices, will the firm adopt a new method, which involves 2 units of land, 2 of labour, 4 of capital, and 8 of entrepreneurial ability?
(c) Suppose the price of labour falls to $1 without any other prices changing.Which of the methods will the firm now choose? Why?

Question 22

List and describe the three main categories of businesses?

Question 23

Explain the two different motives that firms have for choosing the lowest-cost production methods to produce goods and services?

Question 24

"Competition is the mechanism that brings order out of potential chaos in a price-directed economy." Explain.

Question 25

Describe the three major virtues of a market system.

Question 26

List two problems that have contributed to the decline of command systems on a national scale.

Question 27

Explain this quote from Adam Smith: "It is not from the benevolence of the butcher, the brewer, or the baker that we expect our dinner but from their regard to their own interest."

Question 28

Describe the basic features of the circular flow model.

Question 29

Assume that a firm can produce product A, product B, or product C with the resources it currently employs.These resources cost the firm a total of $100 per week, this cost is per resource.Assume, for the purposes of this problem, that the firm's costs cannot be changed.The market prices and the quantities of A, B, and C these resources can produce are given as follows. (a) Compute the firm's profit when it produces A, B, or C and enter these data in the table.(b) Which product will the firm produce?
(c) If the price of A rose to $16, which product will the firm produce?
(d) If the firm produces A at a price of $16, what would tend to happen to the number of firms producing product A?

Question 30

How can technological advance result in creative destruction?

Question 31

What is the relationship between businesses and households in the circular flow model?

Question 32

What factors determine who will get the output?

Question 33

What are the so-called Five Fundamental Questions that every economy must answer?

Question 34

Assume that a firm can produce product A, product B, or product C with the resources it currently employs.These resources cost the firm a total of $100 per week, this cost is per resource.Assume, for the purposes of this problem, that the firm's costs cannot be changed.The market prices and the quantities of A, B, and C these resources can produce are given below. (a) Compute the firm's profit when it produces A, B, or C and enter these data in the table.(b) Which product will the firm produce?
(c) Suppose the quantity of product B the firm was able to produce with the same amount of inputs now rose to 25.Which product will the firm now produce?
(d) As a result of the rise in quantity of product B to 25 that each firm can produce, what will happen to the number of firms producing product B?

Question 35

Assume that a firm finds that its profits will be maximized (or losses minimized) when it produces $30 worth of product X.Each of these techniques shown in the following table will produce exactly $30 worth of X. (a) Which method is most efficient? Why?
(b) Given the above prices, will the firm adopt a new method, which involves 10 units of land, 3 of labour, 2 of capital, and 2 of entrepreneurial ability?
(c) Suppose the price of capital falls to $1 without any other prices changing.Which of the methods will the firm now choose? Why?

Question 36

Why is the consumer the king (or queen) in a market system?

Question 37

"Every economy is based on 'planning' of one sort or another." Interpret and explain.

Question 38

How does consumer choice differ from consumer sovereignty in a market system?

Question 39

What is meant by the guiding function of prices?

Question 40

How does the market system accommodate change in consumer's preferences?

Question 41

In the below circular flow diagram, the household and business sectors are labelled with arrows representing the flows of income and output labelled (a) through (f) and the two appropriate markets labelled (g) and (h).Supply the correct descriptive titles for each of these labels (a) through (h).

Question 42

Provide examples of prominent Canadian corporations and describe the unique implications that arise due to the fact that such corporations are independent legal entities?