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Exam 2: The Market System and the Circular Flow

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Question 1

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Explain the term "laissez-faire capitalism.

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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.

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Explain the most important consequence of legally enforceable property rights?

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The most important consequence of legall...

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

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

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?

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

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?

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?

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

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

What conditions are necessary for economic competition to exist?

List nine characteristics of the market system.

How can technological advance result in creative destruction?

Why does specialization require a convenient means of exchanging goods?

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.

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.

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

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

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."

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