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

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Question 21

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Explain the term "laissez-faire capitalism.

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Pure capitalism is sometimes called "lai...

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Question 22

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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?

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In capitalism, two essential freedoms ar...

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Question 23

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

What conditions are necessary for economic competition to exist?

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

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

Describe the three major virtues of a market system.

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

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?

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

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

Why does specialization require a convenient means of exchanging goods?

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

List and describe the three main categories of businesses?

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

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?

Describe the basic features of the circular flow model.

Explain why the market system is an organizing mechanism.

How can technological advance result in creative destruction?

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