Chapter 4: THE MARKET SYSTEM
NAME: _______________________ _____ PER: ___ SEAT: ___
1. The ownership of property resources by private individuals and organizations
is the institution of private (resources, property) _(1)_. The freedom of
1. _____________________
private businesses to obtain resources and use them to produce goods and
services, is the freedom of (choice, enterprise) _(2)_, while the freedom to 2. _____________________
dispose of property or money as a person sees fit is the freedom of _(3)_.
3. _____________________
2. Self-interest means that each economic unit at tempts to do what is best for
itself, but this might lead to an abuse of power in a market economy if it were
not directed and constrained by (government, competition) _(4)_ Self4. _____________________
interest and selfishness (are, are not) _(5)_ the same thing in a market
5. _____________________
economy.
3. Broadly defined, competition is present if two conditions prevail; these two
conditions are
a. _(6)_ ___________________________________________________ 6. _____________________
b. _(7)_ ___________________________________________________ 7. _____________________
4. In a capitalist economy, individual buyers communicate their demands and
individual sellers communicate their supplies in the system of
(markets, prices) _(8)_ and the outcomes from economic decisions are a
8. _____________________
set of product and resource _(9)_ that are determined by demand and supply. 9. _____________________
5. Market economies make extensive use of capital goods and engage in
roundabout production because it is more (efficient, inefficient) _(10)_ than 10. ____________________
direct production; they practice specialization and the di vision of labor
because the self-sufficient producer or worker tends to be an _(11)_ one.
11. ____________________
6. In market economies money functions chiefly as a medium of
(commerce, exchange) _(12)_. Barter between two individuals will take place 12. ____________________
only if there is a coincidence of (resources, wants) _(13)_.
13. ____________________
7. In a market system, government is active, but is assigned
(a limited, an extensive) _(14)_ role.
14. ____________________
8. List the Four Fundamental Questions every economy must answer.
a. ________________________________________________________
b. ________________________________________________________
c. ________________________________________________________
d. ________________________________________________________
15.
16.
17.
18.
____________________
____________________
____________________
____________________
9. A normal profit (is, is not) _(19)_ an economic cost because it is a payment
19. ____________________
that (must, need not) _(20)_ be paid to (workers, entrepreneurs) _(21)_ but 20. ____________________
an economic profit (is, is not) _(22)_ an economic cost because it (must,
21. ____________________
need not) _(23)_ be paid to them to secure and retain the resources needed 22. ____________________
by the firm.
23. ____________________
24. ____________________
10. Pure or economic profit is equal to the total (revenue, cost) _(24)_ of a firm 25. ____________________
less its total _(25)_.
11. Business firms tend to produce those products from which they can obtain at 26. ____________________
least a(n) (economic, normal) _(26)_ profit and a maximum _(27)_ profit.
27. ____________________
12. If firms in an industry are obtaining economic profits, firms will
(enter, leave) _(28)_ the industry; the price of the industry’s product will
(rise, fall) _(29)_ the industry will employ (more, fewer) _(30)_ resources
and produce a (larger, smaller) _(31)_ output; and the industry’s economic
profits will (increase, decrease) _(32)_ until they are equal to (zero,
infinity) _(33)_.
28. ____________________
29. ____________________
30. ____________________
31. ____________________
32. ____________________
33. ____________________
13. Consumers vote with their dollars for the production of a good or service
when they (sell, buy) _(34)_ it, and because of this, consumers are said to be 34. ____________________
(dependent, sovereign) _(35)_ in a market economy. The buying decisions of 35. ____________________
consumers (restrain, expand) _(36)_ the freedom of firms and resource
36. ____________________
suppliers.
14. Firms are interested in obtaining the largest economic profits possible, so
they try to produce a product in the (most, least) _(37)_ costly way. The
most efficient production techniques depend on the available
(income, technology) _(38)_ and the (prices, quotas) _(39)_ of needed
resources.
37. ____________________
38. ____________________
39. ____________________
15. The market system determines how the total output of the economy will be
distributed among its house holds by determining the (incomes, expenditures)
_(40)_ of each household and by determining the (prices, quality) _(41)_ for 40. ____________________
each good and service produced.
41. ____________________
16. In market economies, change is almost continuous in consumer
(preferences, resources) _(42)_ in the supplies of _(43)_ and in technology. 42. ____________________
To make the appropriate adjustments to these changes, a market economy
43. ____________________
allows price to per form its (monopoly, guiding) _(44)_ function.
44. ____________________
17. The market system fosters technological change. The incentive for a firm to
be the first to use a new and improved technique of production or to produce
a new and better product is a greater economic (profit, loss) _(45)_ and the 45. ____________________
incentive for other firms to follow its lead is the avoidance of _(46)_
46. ____________________
18. Technological advance will require additional (capital, consumer) _(47)_
goods, so the entrepreneur uses profit obtained from the sale of _(48)_
goods to acquire (capital, consumer) _(49)_ goods.
47. ____________________
48. ____________________
49. ____________________
19. A market system promotes (unity, disunity) _(50)_ between private and
50. ____________________
public interests. Firms and resource suppliers seem to be guided by (a visible,
an invisible) _(51)_ hand to allocate the economy’s resources efficiently.
51. ____________________
20. The two economic arguments for a market system are that it promotes
(public, efficient) _(52)_ use of resources and that it uses
(incentives, government) _(53)_ for directing economic activity. The major
noneconomic argument for the market system is that it allows for personal
(wealth, freedom) _(54)_.
52. ____________________
53. ____________________
54. ____________________
CH 4 TRUE—FALSE QUESTIONS NAME: ________________________
PER: ____ SEAT: ____
T
F
1. In a market system, the government owns most of the property resources (land and capital).
T
F
2. Property rights encourage investment, innovation, ex change, maintenance of property, and
economic growth.
T
F
3. The freedom of business firms to produce a particular consumer good is always limited by the
desires of consumers for that good.
T
F
4. The pursuit of economic self-interest is the same thing as selfishness.
T
F
5. When a market is competitive, the individual sellers of a product are unable to reduce the supply
of the product and control its price.
T
F
6. The market system is an organizing mechanism and also a communication network.
T
F
7. The employment of capital to produce goods and service requires that there be “roundabout”
production and it is more efficient than “direct” production.
T
F
8. Increasing the amount of specialization in an economy generally leads to the more efficient use of
its resources. T F
T
F
9. One way human specialization can be achieved is through a division of labor in productive activity.
T
F
10. Money is a device for facilitating the exchange of goods and services.
T
F
11. “Coincidence of wants” means that two persons want to acquire the same good or service.
T
F
12. Shells may serve as money if sellers are generally willing to accept them as money.
T
F
13. One of the Four Fundamental Questions is who will control the output.
T
F
14. Business firms try to maximize their normal profits.
T
F
15. Industries in which economic profits are earned by the firms in the industry will attract the
entry of new firms.
T
F
16. If firms have sufficient time to enter industries, the economic profits of an industry will tend to
disappear.
T
F
17. Business firms are only free to produce whatever they want in any way they wish if they do not
want to maximize profits or to minimize losses.
T
F
18. The derived demand of a resource depends on the demands for the products the resource
produces.
T
F
19. Resources will tend to be used in those industries ca pable of earning normal or economic profits.
T
F
20. Economic efficiency requires that a given output of a good or service be produced in the least
costly way.
T
F
21. If the market price of resource A decreases, firms will tend to employ smaller quantities of
resource A.
T
F
22. Changes in the tastes of consumers are reflected in changes in consumer demand for products.
T
F
23. The incentive that the market system provides to induce technological improvement is the
opportunity for economic profits.
T
F
24. The tendency for individuals pursuing their own self- interests to bring about results that are in
the best interest of society as a whole is often called the “invisible hand.”
T
F
25. A basic economic argument for the market system is that it promotes an efficient use of
resources.
Chapter 5: U.S. ECONOMY
NAME: ____________________________ ____ PER: ___ SEAT: ____
1. There are approximately 109 million (businesses, households) _(1)_ in the
United States. They play a dual role in the economy because they (sell, buy)
_(2)_ their resources and _(3)_ most of the total output of the economy.
1. _____________________
2. _____________________
3. _____________________
2. The largest single source of income in the United States is
(corporate profits, wages and salaries) _(4)_ It is equal to about
(30, 70) _(5)_% of total income.
4. _____________________
5. _____________________
3. In the United States the poorest (1, 20) _(6)_% of all families receive about 6. _____________________
4% of total personal income, and the richest (1, 20) _(7)_% of these families 7. _____________________
receive about 50% of total personal income.
4. The total income of households is disposed of in three ways:
Personal (8) __________________________
,
personal (9) __________________________
and personal (10) _______________________
8. _____________________
9. _____________________
10. ____________________
5. Households use about 13% of their total income to pay for personal
11. ____________________
(taxes, consumption expenditures) _(11)_ and about 84% for personal _(12)_. 12. ____________________
6. If a product has an expected life of 3 years or more it is a
(durable, nondurable) _(13)_ good, whereas if it has an expected life of
less than 3 years it is a _(14)_ good.
13. ____________________
14. ____________________
7. There are millions of business (firms, industries) _(15)_ in the United
States. The legal form of the great majority of them is the (sole proprietor
ship, partnership, corporation) _(16)_ but the legal form that produces
almost 90% of the sales of the U.S. economy is the _(17)_.
15. ____________________
8. Shares of ownership of corporations are called (stocks, bonds) _(18)_,
whereas promises by corporations to repay a loan, usually at a fixed rate of
interest, are _(19)_.
18. ____________________
9. The liabilities of a sole proprietor and of partners are (limited, unlimited)
_(20)_, but the liabilities of stockholders in a corporation are _(21)_.
20. ____________________
21. ____________________
10. The separation of ownership and control in a corporation may create a
(free-rider, principal—agent) _(22)_ problem. In this case, stockholders
would be the (riders, principals, agents) _(23)_ and managers would be the
_(24)_.
22. ____________________
23. ____________________
24. ____________________
11. List the five economic functions of government.
a. _(25)____________________________________
b. _(26)____________________________________
c. _(27)____________________________________
d. _(28)____________________________________
e. _(29)____________________________________
25.
26.
27.
28.
29.
12. To control monopoly, the U.S. government has created commissions to
(tax, regulate) _(30)_ natural monopolies, and in cases at the local level,
government has become an (agent, owner) _(31)_. Government has also
enacted (trust, antitrust) _(32)_ laws to maintain competition.
30. ____________________
31. ____________________
32. ____________________
16. ____________________
17. ____________________
19. ____________________
____________________
____________________
____________________
____________________
____________________
13. The market system, because it is an impersonal mechanism, results in an
(equal, unequal) _(33)_ distribution of income. To redistribute income from
the upper- to the lower-income groups, the government has provided
(transfer, tax) _(34)_ payments, engaged in (military, market) _(35)_
intervention, and used the (income, sales) _(36)_ tax to raise much of its
revenues.
14. Government frequently reallocates resources when it finds instances of
(market, public) _(37)_ failure. The two major cases of such failure occur
when the competitive market system either
a. _(38)_________________________________
b. _(39)_________________________________
15. Competitive markets bring about an efficient allocation of resources only
if there are no (private, spillover) _(40)_ costs or benefits in the
consumption and production of a good or service.
33. ____________________
34. ____________________
35. ____________________
36. ____________________
37. ____________________
38. ____________________
39. ____________________
40. ____________________
16. There is an externality whenever some of the costs of producing a product
accrue to people other than the (seller, buyer) _(41)_ or some of the
benefits from consuming a product accrue to people other than the _(42)_.
41. ____________________
42. ____________________
17a. What two things can government do to make the market reflect
spillover costs?
(1) _(43)__________________________________________
(2) _(44)__________________________________________
43. ____________________
44. ____________________
17b. What three things can government do to make the market reflect
spillover benefits?
(1) _(45)___________________________________________
(2) _(46)___________________________________________
(3) _(47)___________________________________________
45. ____________________
46. ____________________
47. ____________________
18. One characteristic of a public good is (rivalry, nonrivalry)
_(48)_ and the other characteristic of a public good is (excludability,
48. ____________________
nonexcludability) _(49)_. A private firm will not find it profitable to produce 49. ____________________
a public good because there is a (free-rider, principal—agent) _(50)_
50. ____________________
problem.
19. To reallocate resources from the production of private to the production of
public and quasi-public goods, government reduces the demand for private
goods by (taxing, subsidizing) _(51)_ consumers and then uses the (profits,
tax revenue) _(52)_ to buy public or quasi-public goods.
51. ____________________
52. ____________________
20. To stabilize the economy with less than full employment, government may
try to increase total spending by (increasing, decreasing) _(53)_ its
53.
expenditures for public goods and services by (increasing, decreasing) _(54)_ 54.
taxes, or by (raising, lowering) _(55)_ interest rates. When there are
55.
inflationary pressures, the government may try to decrease total spending by
(decreasing, increasing) _(56)_ its expenditures for public goods and services, 56.
by _(57)_ taxes, or by (raising, lowering) _(58)_ interest rates.
57.
58.
____________________
____________________
____________________
____________________
____________________
____________________
21. An examination of government finance reveals that
a. since 1960 government purchases of goods and services as a percentage of
total output (increased, decreased) _(59)_.
59. ____________________
b. but government transfer payments as a percent age of domestic output since
1960 has (increased, decreased) _(60)_.
60. ____________________
c. and the tax revenues required to finance total government spending (purchases
plus transfer payments) are today about (30, 70) _(61)_% of domestic output. 61. ____________________
d. Government transfer payments are (exhaustive, nonexhaustive) _(62)_,
62. ____________________
whereas government purchases of goods and services are _(63)_ because they
63. ____________________
absorb resources.
22. The most important source of revenue for the Federal government is the
(personal income, payroll) _(64)_ tax; next in importance is the _(65)_ tax. The
three largest categories of Federal expenditures ranked by budget size are
(health, national defense, pensions and income security) _(66)_ and _(67)_.
64.
65.
66.
67.
23. Federal income tax rates are progressive, which means that people with
(lower, higher) _(68)_ incomes pay a larger percentage of that income as taxes
than do persons with _(69)_ incomes. The tax rate paid on an additional unit of
income is the (average, marginal) _(70)_ tax rate, while the total tax paid
divided by the total taxable income is the _(71)_ tax rate.
68. ____________________
69. ____________________
70. ____________________
71. ____________________
24. Many state governments rely primarily on (property, sales and excise)
_(72)_ taxes and (personal, corporate) _(73)_ income taxes for their revenue,
which they spend- on (national defense, public welfare) _(74)_ and (interest,
education)
____________________
____________________
____________________
____________________
72. ____________________
73. ____________________
74. ____________________
25. At local levels of government the single most important source of revenue is
the (income, property) _(75)_ tax and the single most important expenditure is 75. ____________________
for (public safety, education) _(76)_.
76. ____________________
CH 5
TRUE—FALSE
NAME: _________________________________ PER: ____ SEAT: ____
T
F
1. The personal distribution of income describes the manner in which society’s total personal income
is divided among wages and salaries, corporate profits, proprietors’ income, interest, and rents.
T
F
2. Personal taxes have risen in relative terms since World War I
T
F
3. Most of the personal saving in the U.S. economy is done by those households in the top 10% of its
income receivers.
T
F
4. Dissaving means that personal consumption expenditures exceed after-tax income.
T
F
5. A durable good is defined as a good that has an expected life of 3 years or more.
T
F
6. A plant is defined as a group of firms under a single management.
T
F
7. An industry is a group of firms that produce the same or nearly the same products.
T
F
8. Limited liability refers to the fact that all members of a partnership are liable for the debts
incurred by one another.
T
F
9. The corporate form of organization is the least used by firms in the United States.
T
F
10. The corporation in the United States has a tax ad vantage over other legal forms of business
organization.
T
F
11. Whether a business firm should incorporate or not depends chiefly on the amount of money
capital it must have to finance the enterprise.
T
F
12. A limited liability company is like an ordinary part nership for tax purposes, but like a corporation
in matters of liability.
T
F
13. Bonds are shares of ownership in a corporation.
T
F
14. When the interests of the principals are the same as those of agents, there is a free-rider
problem.
T
F
15. When the Federal government provides for a monetary system, it is doing so primarily to maintain
competition.
T
F
16. Transfer payments are one means government uses to redistribute income.
T
F
17. If demand and supply reflected all the benefits and costs of producing a product, there would be
efficient resource use.
T
F
18. When there are spillover costs, more resources are allocated to the production of the product
and more is produced than is efficient.
T
F
19. One way for government to correct for spillover costs from a product is to increase its demand.
T
F
20. When there are spillover benefits from a product, there will be an overallocation of resources
for its production.
T
F
21. One way for government to correct spillover benefits from a product is to subsidize consumers of
the product.
T
F
22. Nonexcludability means government provides public goods so as to exclude private businesses
from providing them.
T
F
23. Obtaining the benefits of private goods requires that they be purchased; obtaining benefits from
public goods requires only that they be produced.
T
F
24. Government provides homeland defense services because these services have public benefits and
because private producers of such services experience the freerider problem.
T
F
25. When the Federal government takes actions to control unemployment or inflation it is performing
the allocative function of government.
T
F
26. Government purchases of goods and services are called nonexhaustive expenditures and
government transfer payments are called exhaustive expenditures.
T
F
27. When a government levies taxes and uses the tax revenue to make transfer payments, it shifts
resources from the production of private goods to the production of
public goods.
T
F
28. The chief source of revenue for the Federal government is the corporate income tax.
T
F
29. If the marginal tax rate is higher than the average tax rate, the average tax rate will fall as
income rises.
T
F
30. Property taxes are the largest percentage of the total revenues of local governments.