Who decides whether these particular hardware products should continue to be produced and offered for sale? LO3 Answer: The quest for profit led firms to produce these goods. Producers looked for and found the least-cost combination of resources in producing their output. Resource suppliers, seeking income, made these resources available. Consumers, through their dollar votes, ultimately decide on what will continue to be produced.
How does the emergence of MP3 or iPod technology relate to this idea? LO3 Answer: Creative destruction refers to the process by which the creation of new products and production techniques destroys the market positions of firms committed to producing only existing products or using outdated methods. The ability to download and store a large number of songs, and the superior quality of MP3 is causing a decline in the CD industry, just as CDs once replaced cassette tapes, which had previously replaced phonographs records.
In market economies, firms rarely worry about the availability of inputs to produce their products, whereas in command economies input availability is a constant concern. Why the difference? LO4 Answer: In market economies, buyers of inputs know that sellers want to make resources available for sale because that is how they earn their profits.
In command economies the availability of inputs depends on what was specified in the plan, and how well the plan was executed. There is no opportunity at least not legally to offer greater payments to get those resources provided.
Distinguish between the resource market and the product market in the circular flow model. In what way are businesses and households both sellers and buyers in this model? What are the flows in the circular flow model? LO5 Answer: The resource markets are where the owners of the resources the households sell their resources to the buyers of the resources businesses.
In the product markets, businesses sell the goods and services they have produced to the buyers of the goods and services, the households. Households individuals either own all economic resources directly or own them indirectly through their ownership of business corporations.
These households are willing to sell their resources to businesses because attractive prices draw them into specific resource markets. Businesses buy resources because they are necessary for producing goods and services. The interaction of the buyers and sellers establishes the price of each resource. In the product market, businesses are the sellers and householders are the buyers; their role in the market has been reversed.
Each group of economic units both buys and sells. How does shielding employees and suppliers from business risk help to improve economic outcomes?
Who is responsible for managing business risks in the market system? LO6 Answer: This process allows the owners of a business to attract employees and. If some of the business risk was put on these groups, most of them would stay away.
In the same sense, all the business risk is put on the owners, due to the fact that they are the ones who will enjoy the profits, or suffer the losses, of the business. This gives them an incentive to manage the business wisely.
Answer: The institution of private property is a primary reason why resources are arranged logically and productively. Private property eliminates randomness to the allocation of resources, as property owners act in deliberate ways to protect and maximize the benefits from their property. Owners pursue the greatest possible returns from their property, drawing resources to their most valued uses. Through the interaction of millions of economic agents all trying to use their private property to maximize wellbeing, a complex, logical, and productive arrangement of resources results.
Decide whether each of the following descriptions most closely corresponds to being part of a command system, a market system, or a laissez-faire system. LO1 a. A woman who wants to start a flower shop finds she cannot do so unless the central government has already decided to allow a flower shop in her area.
Shops stock and sell the goods their customers want but the government levies a sales tax on each transaction in order to fund elementary schools, public libraries, and welfare programs for the poor. The only taxes levied by the government are to pay for national defense, law enforcement, and a legal system designed to enforce contracts between private citizens. Answer: a. Match each term with the correct definition. LO2 private property freedom of enterprise mutually agreeable freedom of choice self-interest competition market a.
An institution that brings buyers and sellers together. The right of private persons and firms to obtain, control, employ, dispose of, and bequeath land, capital, and other property. The presence in a market of independent buyers and sellers who compete with one another and who are free to enter and exit the market as they each see fit. The freedom of firms to obtain economic resources, decide what products to produce with those resources, and sell those products in markets of their choice.
What each individual or firm believes is best for itself and seeks to obtain. Economic transactions willingly undertaken by both the buyer and the seller because each feels that the transaction will make him or her better off. The freedom of resource owners to dispose of their resources as they think best; of workers to enter any line of work for which they are qualified; and of consumers to spend their incomes in whatever way they feel is most appropriate.
Market; b. Private Property; c. Competition; d. Freedom of Enterprise; e. Self-interest; f. Mutually Agreeable; g. Freedom of Choice. True or False: Money must be issued by a government for people to accept it. LO2 Answer: False Many things have been used as money without having been approved by or produced by governments. Examples included seashells, cattle, and cigarettes. Money is socially defined and whatever a society accepts as a medium of exchange is money.
Suppose also that each of the three techniques shown in the table below will produce the desired output. With the resource prices shown, which technique will the firm choose? Will production using that technique entail profit or loss? What will be the amount of that profit or loss? Will the industry expand or contract? When will that expansion or contraction end? Assume now that a new technique, technique 4, is developed.
It combines 2 units of labor, 2 of land, 6 of capital, and 3 of entrepreneurial ability. In view of the resource prices in the table, will the firm adopt the new technique? Explain your answer. Which technique will the producer now choose? Resources that are scarcest relative to the demand for them have the highest prices.
As a result, producers use these resources as sparingly as is possible. Does your answer to part c, above, bear out this contention? To calculate the cost of each technique, multiply the price per unit of resource by the amount of the resource employed by the technique and add these together. The same process is applied to Techniques 2 and 3.
The statement is logical. Increasing scarcity of a resource causes its price to rise. Firms ignoring higher resource prices will become high-cost producers.
Firms switching to the less expensive inputs become lower-cost producers and earn higher profits than high-cost producers. The market system, therefore, forces producers to conserve on the use of highly scarce resources. Question 7c confirms this: Technique 1 was adopted because labor had become less expensive. Identify each of the following quotes as being an example of either: the coordination problem, the invisible hand, creative destruction, or the incentive problem.
LO4 a. True or False: Households sell finished products to businesses. LO6 Answer: False. Households sell resources to businesses, which use those resources to produce goods and services that are in turn bought and consumed by households.
Franklin, John, Henry, and Harry have decided to pool their financial resources and business skills in order to open up and run a coffee shop. They will share any profits or losses that the business generates and will be personally responsible for making good on any debt that their business undertakes. Their business should be classified as a: LO6 Answer: Partnership. The coffee shop that these guys are starting should be classified as a partnership because of the relatively few members involved and because each member is personally liable for any losses that the business generates Both sole proprietorships and partnerships share that same feature—that those who own and run them are personally responsible for any losses that their businesses generate and for any debts that their businesses owe.
That is true because a corporation is its own legal entity, completely separate from its owners. Thus, any money that it owes to creditors is money owed by the corporation itself, and not by those who own the corporation. Ted and Fred are the owners of a gas station.
LO6 a. Lawrence b. Ted c. Fred d. Ted and Fred e. So in this case, the loss will be borne by Ted and Fred, since they are the owners. Lawrence, by contrast, is an employee and not legally bound to bear any business risk. So he must be paid his salary on time and in full whether or not the firm is running a profit, a loss, or just breaking even. Table 2. So you know each technique produces 5 bars of soap.
LO3 a. Which is now the least-profitable technique? You are commenting using your Google account. You are commenting using your Twitter account. You are commenting using your Facebook account. Notify me of new comments via email. Notify me of new posts via email. Menu Skip to content.
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