Deck 2: The Market System and the Circular Flow

Question 1

The main mechanism that regulates the market system is

A)self-interest.
B)private property.
C)competition.
D)freedom of enterprise and choice.

Answer 1

competition.

Question 2

Broadl y defined, competition involves

A)private property and freedom of expression.
B)independently acting buyers and sellers and freedom to enter or leave markets.
C)increasing opportunity costs and diminishing marginal utility.
D)capital goods and division of labor.

Answer 2

independently acting buyers and sellers and freedom to enter or leave markets.

Question 3

Which of the following is a distinguishing feature of laissez-faire capitalism?

A)public ownership of all capital
B)central planning
C)minimal government intervention
D)a circular flow of goods, resources, and money

Answer 3

minimal government intervention

Question 4

Specialization in production is economically beneficial primarily because it

A)allows everyone to have a job that he or she likes.
B)permits the production of a larger output with fixed amounts of resources.
C)facilitates trade by bartering.
D)guarantees full employment.

Question 5

Which of the following is not a typical characteristic of a market system?

A)private property
B)freedom of enterprise
C)government ownership of most property resources
D)competition in product and resource markets

Question 6

Private property

A)discourages cooperation because people don't want to part with what they own.
B)discourages innovation, as people are often afraid to risk losing their own property.
C)encourages owners to maintain or improve their property so as to preserve or enhance value.
D)does everything indicated by the other answers.

Question 7

The presence of market failures implies that

A)money is not an effective tool for exchange in a market system.
B)there is an active role for government, even in a market system.
C)individuals and firms should strive to be self-sufficient rather than specialize.
D)command systems are superior to market systems in the allocation of resources.

Question 8

Freedom of enterprise

A)is a characteristic that is common to most economic systems.
B)in a market system means that entrepreneurs can obtain and use economic resources without any legal restraint.
C)allows businesses, within broad limits, to choose what goods to produce.
D)refers primarily to the right of consumers to purchase what they want.

Question 9

The French term "laissez-faire" means

A)"there is no free lunch."
B)"let it be."
C)"circular flow."
D)"public ownership."

Question 10

Command systems are also known as

A)market systems.
B)pure capitalism.
C)laissez-faire capitalism.
D)communism.

Question 11

Copyrights and trademarks are examples of

A)capital goods.
B)human capital.
C)property rights.
D)public goods.

Question 12

The term "laissez-faire" suggests that

A)land and other natural resources should be privatel y owned, but capital should be publicly owned.
B)land and other natural resources should be publicly owned, but capital should be privately owned.
C)government should not interfere with the operation of the economy.
D)government action is absolutely necessary if the economy is to achieve full employment and full production.

Question 13

The use of money contributes to economic efficiency because

A)governmental direction of the production and distribution of output can be avoided by using money.
B)roundabout production could not occur without the availability of money.
C)it is necessary for the creation of capital goods.
D)it promotes specialization by overcoming the problems with barter.

Question 14

Property rights are important because they

A)ensure an equal distribution of income.
B)encourage cooperation by improving the chances of mutually agreeable transactions.
C)guarantee that any exchange will make all parties better off than prior to the exchange.
D)allow the government to control how resources are allocated.

Question 15

The division of labor means that

A)labor markets are geographically segmented.
B)unskilled workers outnumber skilled workers.
C)workers specialize in various production tasks.
D)each worker performs a large number of tasks.

Question 16

Which of the following is a distinguishing feature of a command system?

A)private ownership of all capital
B)central planning
C)heavy reliance on markets
D)widespread dispersion of economic power

Question 17

Examples of command economies are

A)the United States and Japan.
B)Sweden and Norway.
C)Mexico and Brazil.
D)Cuba and North Korea.

Question 18

Competition means that

A)sellers can manipulate market price by causing product scarcities.
B)there are independently acting buyers and sellers in each market.
C)a product can be purchased at a number of different prices.
D)there is more than one seller in a market.

Question 19

An economic system

A)requires a grouping of private markets linked to one another.
B)is a particular set of institutional arrangements and a coordinating mechanism used to respond to the economizing problem.
C)requires some sort of centralized authority (such as government) to coordinate economic activity.
D)is a plan or scheme that allows a firm to make money at some other firm's expense.

Question 20

Specialization-the division of labor-enhances productivity and efficiency by

A)allowing workers to take advantage of existing differences in their abilities and skills.
B)avoiding the time loss involved in shifting from one production task to another.
C)allowing workers to develop skills by working on one, or a limited number, of tasks.
D)all of the means identified in the other answers.

Question 21

If competitive industry Z is making substantial economic profit, output will

A)fall in industry Z and firms will likely leave the market.
B)fall in all industries except industry Z.
C)expand in industry Z, as more resources will move to that industry.
D)expand in industry Z, but no new firms will enter the market.

Question 22

"Consumer sovereignty" refers to the

A)fact that resource prices are higher than product prices in capitalistic economies.
B)idea that the pursuit of self-interest is in the public interest.
C)idea that the decisions of producers must ultimately conform to consumer demands.
D)fact that a federal agency exists to protect consumers from harmful and defective products.

Question 23

If a competitive industry is neither expanding nor contracting, we would expect

A)total revenue to be zero.
B)economic profits to be zero.
C)total opportunity cost to be zero.
D)more resources to flow to that industry.

Question 24

Economic profits in an industry suggest the industry

A)can earn more profits by increasing product price.
B)should be larger to better satisfy consumers' desire for the product.
C)has excess production capacity.
D)is the size that consumers want it to be.

Question 25

The market system's answer to the fundamental question "How will the system accommodate change?" is essentially

A)"Through government leadership and direction."
B)"Through the guiding function of prices and the incentive function of profits."
C)"Through training and retraining programs."
D)"Through trial and error."

Question 26

The economic function of profits and losses is to

A)bring about a more equal distribution of income.
B)signal that resources should be reallocated.
C)eliminate small firms and reduce competition.
D)tell government which industries need to be subsidized.

Question 27

The competitive market system

A)encourages innovation because government provides tax breaks and subsidies to those who develop new products or new productive techniques.
B)discourages innovation because it is difficult to acquire additional capital in the form of new machinery and equipment.
C)discourages innovation because firms want to get all the profits possible from existing machinery and equipment.
D)encourages innovation because successful innovators are rewarded with economic profits.

Question 28

In a market economy, a significant change in consumers' desire for product X will

A)alter the profits or losses received by suppliers of product X.
B)cause a reallocation of scarce resources.
C)cause some industries to expand and others to contract.
D)do all of the things mentioned in the other answers.

Question 29

Which of the following characteristics is least unique to a market system?

A)private ownership of property resources
B)competition among buyers and sellers pursuing monetary returns
C)the widespread use of money
D)freedom of enterprise and choice

Question 30

The market system's answer to the fundamental question "How will the system promote progress?" is essentially

A)"Through government-funded research programs."
B)"Through redistribution of income to promote greater equality."
C)"Through training and retraining programs."
D)"Through the profit potential that encourages development of new technology."

Question 31

Firms are motivated to minimize production costs because

A)it is the most environmentally friendly way to produce goods.
B)least-cost production techniques use the smallest total quantity of resources.
C)competitive pressures in the market will drive out higher-cost producers.
D)the government provides tax credits and subsidies to low-cost producers.

Question 32

The most efficient combination of resources in producing a given output is the combination that

A)comes closest to using the same quantities of land, labor, capital, and entrepreneurial ability.
B)minimizes the cost per unit of output.
C)uses the smallest total quantity of all resources.
D)conserves most on the use of labor.

Question 33

In a competitive market economy, firms select the least-cost production technique because

A)such choices will result in full employment of available resources.
B)to do so will maximize the firms' profits.
C)this will prevent new firms from entering the industry.
D)"dollar voting" by consumers mandates such a choice.

Question 34

The market system's answer to the fundamental question "How will the goods and services be produced?" is essentially

A)"With as much machinery as possible."
B)"Using the latest technology."
C)"By exploiting labor."
D)"In ways that minimize the cost per unit of output."

Question 35

Which of the following is one of the Five Fundamental Questions?

A)Which products will be in scarce supply and which in excess supply?
B)Who should appoint the head of the central bank?
C)How much should society save?
D)What goods and services will be produced?

Question 36

If consumer desire for product X increases, all of the following will occur except

A)an increase in the profits of industry X.
B)an increase in the quantity of resources employed by industry X.
C)an increase in the output of industry X.
D)a decrease in the quantity of resources employed in industry X.

Question 37

If competitive industry Y is incurring substantial losses, output will

A)expand as resources move toward industry Y.
B)contract as resources move toward industry Y.
C)contract as resources move away from industry Y.
D)expand as resources move away from industry Y.

Question 38

From society's point of view, the economic function of profits and losses is to

A)promote the equal distribution of real assets and wealth.
B)achieve full employment and price level stability.
C)contribute to a more equal distribution of income.
D)reallocate resources from less-desired to more-desired uses.Topic: Five Fundamental Questions

Question 39

In a market economy, the distribution of output will be determined primarily by

A)consumer needs and preferences.
B)the quantities and prices of the resources that households supply.
C)government regulations that provide a minimum income for all.
D)a social consensus as to which distribution of income is most equitable.

Question 40

Economic profits and losses

A)are both considered by economists to be a part of production costs.
B)are essential to the reallocation of resources from less desired to more desired goods.
C)have no influence on the composition of domestic output.
D)equalize the distribution of income in the long run.

Question 41

Households and businesses are

A)both buyers in the resource market.
B)both sellers in the product market.
C)sellers in the resource and product markets respectively.
D)sellers in the product and resource markets respectively.

Question 42

The incentive problem under communist central planning refers to the idea that

A)planners had to direct required inputs to each enterprise.
B)workers, managers, and entrepreneurs could not personally gain by responding to shortages or surpluses or by introducing new and improved products.
C)the immediate effect of more investment was less consumption.
D)exports had to be equal to imports for a central plan to work.

Question 43

Suppose that an individual sees a tremendous opportunity to produce and sell a new product but dismisses the idea because there is no way to exploit this opportunity for personal gain.This situation best identifies the

A)coordination problem under communist central planning.
B)self-sufficiency dilemma under communism.
C)asymmetric information problem under communism.
D)incentive problem under communist central planning.

Question 44

In what type of business do the owners bear no personal financial responsibility for the company's debts and obligations?

A)partnerships
B)corporations
C)sole proprietorships
D)in all of the businesses listed in the other answers

Question 45

The two basic markets shown by the simple circular flow model are

A)capital goods and consumer goods.
B)competitive and regulated.
C)product and resource.
D)household and business.

Question 46

In terms of the circular flow diagram, households make expenditures in the market and receive income through the market.

A)product; financial
B)resource; product
C)product; resource
D)capital; product

Question 47

According to the concept of the "invisible hand," if Susie opens and operates a profitable childcare center, then

A)government should regulate the business to ensure quality.
B)the profit Susie earns indicates that she is overcharging for her services.
C)she has served society's interests by providing a desired good or service.
D)this demonstrates that consumer sovereignty is not present in this market.

Question 48

If products were in short or surplus supply in the Soviet Union,

A)price and profit signals eliminated those shortages and surpluses.
B)price and profit signals intensified those shortages and surpluses.
C)producers would not react because no price or profit signals occurred.
D)the planners would immediately adjust production to achieve equilibrium.Topic: Economic Systems

Question 49

"Under central planning, some group has to decide how to get the necessary inputs produced in the right amounts and delivered to the right places at the right time.This is a nearly impossible task without markets and profits." This quotation best identifies the

A)incentive problem under central planning.
B)coordination problem under central planning.
C)self-sufficiency dilemma under communism.
D)resource overcommitment problem under communism.

Question 50

The simple circular flow model shows that

A)households are on the buying side of both product and resource markets.
B)businesses are on the selling side of both product and resource markets.
C)households are on the selling side of the resource market and on the buying side of the product market.
D)businesses are on the buying side of the product market and on the selling side of the resource market.

Question 51

The invisible hand refers to the

A)fact that the U.S.tax system redistributes income from rich to poor.
B)notion that, under competition, decisions motivated by self-interest promote the social interest.
C)tendency of monopolistic sellers to raise prices above competitive levels.
D)fact that government controls the functioning of the market system.

Question 52

"Because the outputs of many industries are the inputs to other industries, the failure of any single industry to fulfil the output quantities specified in the central plan caused a chain reaction of adverse repercussions on production." This quotation best identifies the

A)incentive problem under central planning.
B)self-sufficiency dilemma under communism.
C)resource overcommitment problem under communism.
D)coordination problem under central planning.Topic: Economic Systems

Question 53

The dollar votes of consumers ultimately determine the composition of output and the allocation of resources in a market economy.This statement best describes the concept of

A)derived demand.
B)consumer sovereignty.
C)the invisible hand.
D)market failure.

Question 54

In the resource market,

A)businesses borrow financial capital from households.
B)businesses sell services to households.
C)households sell resources to businesses.
D)firms sell raw materials to households.

Question 55

The market system

A)produces considerable inefficiency in the use of scarce resources.
B)effectively harnesses the incentives of workers and entrepreneurs.
C)is not consistent with freedom of choice in the long run.
D)has slowly lost ground to emerging command systems.

Question 56

In the simple circular flow model,

A)households are buyers of resources.
B)businesses are sellers of final products.
C)households are sellers of final products.
D)there are real flows of goods, services, and resources, but not money flows.

Question 57

"Consumer sovereignty" means that

A)buyers can dictate the prices at which goods and services will be offered.
B)advertising is ineffective because consumers already know what they want.
C)buyers control the quality of goods and services through regulatory agencies.
D)buyers determine what will be produced based on their "dollar votes" for the goods and services offered by sellers.

Question 58

The invisible hand concept suggests that

A)market failures imply the need for a national economic plan.
B)big businesses are inherently more efficient than small businesses.
C)the competitiveness of a capitalistic market economy invariably diminishes over time.
D)assuming competition, private and public interests will coincide.

Question 59

In terms of the circular flow diagram, businesses obtain revenue through the market and make expenditures in the market.

A)product; financial
B)resource; product
C)product; resource
D)capital; product

Question 60

Innovation lagged in the centrally planned economies because

A)there was too much domestic business competition.
B)there was too much competition from foreign firms.
C)enterprises resisted innovation in fear that their production targets would be raised.
D)exports had to equal imports for the plan to work.

Question 61

The invisible hand refers to the many indirect controls that the federal government imposes in a market system.

Question 62

A market system tends to restrict business risk to owners and investors.This results in which of the following benefits?

A)It encourages more people to become entrepreneurs.
B)Firms have to pay more to attract inputs, as these inputs have to share the risk.
C)Firms focus attention on prudent risk management, as it is profitable to manage risk.
D)Income becomes more equally distributed.

Question 63

A market system tends to restrict business risk to owners and investors.This results in which of the following benefits?

A)a more stable macroeconomy with fewer recessions
B)Firms are better able to attract inputs, as these inputs do not have to share the risk.
C)Government agencies are better prepared to help when businesses fail.
D)consistently lower prices for consumers

Question 64

(Consider This) Martha's Milkshake Company buys earthquake insurance from the Stable Ground Insurance Company.Based on this purchase, economists would conclude that

A)Martha's believes a damaging earthquake is imminent.
B)Stable Ground believes no damaging earthquakes will occur.
C)Martha's has a lower tolerance for earthquake risk than Stable Ground.
D)Martha's has a greater tolerance for earthquake risk than Stable Ground.

Question 65

Money functions as a medium of exchange by eliminating the need for a coincidence of wants.

Question 66

Costs can be defined as total payments made to workers, landowners, and capital suppliers less payments to the entrepreneur for organizing and combining the other resources used to produce a good.

Question 67

In a market system,

A)firm owners and employees share business risk more or less equally.
B)a firm's employees and suppliers are largely shielded from risk, relative to business owners.
C)employees and suppliers face the greatest risks, because firms can shut down without notice and leave them unpaid.
D)a firm's owners are largely shielded from risk because they can walk away from the business at any time.

Question 68

(Consider This) In 1975, McDonald's introduced its Egg McMuffin breakfast sandwich, which remains popular and profitable today.This longevity illustrates the idea of

A)opportunity cost.
B)upsloping supply.
C)consumer sovereignty.
D)specialization.

Question 69

Consumer sovereignty means that legislation now protects the rights of consumers to dispose of their incomes as they see fit.

Question 70

Which of the following best illustrates the circular flow model in action?

A)Bobbie goes to work and builds cars; she uses the income she receives to buy food at the grocery store.
B)Evan buys a new couch; the owner of the furniture store uses some of the money from the sale to pay her supplier and uses the rest to take her family out to dinner.
C)Boeing experiences a surge in orders for new airplanes, prompting the company to hire more workers.
D)All of these answers illustrate the workings of the circular flow model.

Question 71

Continued losses in an industry will cause some firms to reduce output or eventually leave the industry.

Question 72

The guiding function of prices tends to keep resources flowing toward their most highly valued uses.

Question 73

(Consider This) Since World War II,

A)North Korea's command economy has significantly outperformed South Korea's market economy.
B)South Korea's command economy has significantly outperformed North Korea's market economy.
C)North Korea's market economy has significantly outperformed South Korea's command economy.
D)South Korea's market economy has significantly outperformed North Korea's command economy.

Question 74

The wants of consumers are expressed in the product market with "dollar votes."

Question 75

Risk management in command economies

A)is easy because there is no risk.
B)is easy because the government controls most activity and can eliminate risk.
C)tends to be done poorly because government officials do not understand risk.
D)tends to be done poorly because decision makers are insulated from the risk of making a poor decision.

Question 76

Specialization may expand total output even though the individuals involved may have identical abilities.

Question 77

Risk is a problem faced

A)only in market systems.
B)only in command systems.
C)in both market systems and command systems.
D)in neither market systems nor command systems, only in laissez-faire capitalism.

Question 78

(Consider This) Which of the following statements about insurance and risk is true?

A)Insurance inhibits economic growth and investment by discouraging risk-taking.
B)Insurance transfers risk from those with a high tolerance for risk to those with a low tolerance for risk.
C)Insurance companies always earn profits because insurance premiums always exceed the payout for insured events.
D)Insurance transfers risk from those with a low tolerance for risk to those with a higher tolerance for risk.

Question 79

Market economies use capital goods because they improve productive efficiency.

Question 80

(Last Word) According to economist Donald Boudreaux, the world's tens of billions of individual resources get arranged productively

A)because government has become highly effective at central planning.
B)because private property encourages people to consider the alternative uses of their resources and select those that provide the most rewards.
C)because people tend to be creative and orderly.
D)through random trial and error.