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

Question 1

What are the economic advantages of the division of labour?

Answer 1

Specialization enables individuals to take advantage of existing differences in their abilities and skills.Other advantages come from increased productivity or output per worker as specialized workers gain skills in performing one task and avoid loss of time in switching from one task to another.Therefore, more is produced with the same amount of resources as before specialization.

Question 2

Explain the term "laissez-faire capitalism.

Answer 2

Pure capitalism is sometimes called "laissez faire" capitalism which is a French term for "let it be." In pure capitalism the government's role is limited to protecting private property and establishing the legal framework for free enterprise and free markets to function.

Question 3

Why does specialization require a convenient means of exchanging goods?

Answer 3

As consumers, individuals prefer to have a wide range of products to satisfy their desires.However, when individuals specialize in production, they focus their efforts on producing one or a few goods.This limited range of production does not match their preferences in consumption.Therefore, individuals must be able to exchange the goods that they specialize in for other goods that they desire to consume.Without a convenient means of exchanging goods, individuals could only consume what they produce.Instead, individuals would be jacks-of-all-trades producing a wide variety of products for their own consumption.There would be little incentive to specialize and to take advantage of the resulting increase in productivity.

Question 4

Describe two types of specialization in production.

Question 5

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

Question 6

Explain why the market system is an organizing mechanism.

Question 7

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

Question 8

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 9

Explain what is meant by a command economy.

Question 10

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

Question 11

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

Question 12

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

Question 13

Explain the most important consequence of legally enforceable property rights?

Question 14

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 15

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 16

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

Question 17

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

Question 18

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 19

What conditions are necessary for economic competition to exist?

Question 20

List nine characteristics of the market system.

Question 21

What factors determine who will get the output?

Question 22

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

Question 23

What is meant by the guiding function of prices?

Question 24

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 25

Describe the basic features of the circular flow model.

Question 26

List and describe the three main categories of businesses?

Question 27

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 28

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

Question 29

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

Question 30

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 31

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 32

Describe the three major virtues of a market system.

Question 33

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 34

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

Question 35

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

Question 36

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

Question 37

How can technological advance result in creative destruction?

Question 38

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

Question 39

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

Question 40

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

Question 41

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

Question 42

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).