ECN 101 Chapter Notes - Chapter 2: Consumer Sovereignty, The Incentive, Planned Economy

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ECN 101

Chapter 2

Sept 14th

Economic system - a particular set of institutional arrangements and a coordinating

mechanism for producing good and services - to respond to the economic problem.

It determines: 1. what goods are produced 2.who gets them 3.how to accommodate

change 4.how to promote technological change

it differs: 1.who owns the factors of production 2. the method used to motivate,

coordinate and direct economic activity

Laissez-Faire (let it be) Capitalism - or pure capitalism - government’s role is limited to

protecting private property, establishing a legal environment in which contracts can be enforced

and ppl can interact in markets to buy and cell goods.

-Property (land, labour, capital) resources are privately owned.

-Markets and prices are used to direct and coordinate economic activities

-The gov role is limited to protecting private property, and establishing a legal environment.

The Command System (socialism or communism) - when government owns most

property resources and economic decisions are made according to a central plan. It’s when

government takes most economics decisions.

-No private property (North Korea)

-Decisions are made by a central gov body

The Market System (capitalism or mixed economics) - private ownership of

resources, the use of markets and prices to coordinate and direct economic activity.

- Consumers determines what is to be produced

Characteristics of the Market System:

1. Private property - (land and capital) - the right of private property and ﬁrms to obtain, own,

control, employ, dispose of, and bequeath land, capital, and other property. Property rights

encourage ppl to cooperate by helping to ensure that only mutually agreeable economic

transactions take place. Property rights extend to intellectual property through patents,

copyrights, and trademarks.

2. Freedom of enterprise and choice

1. of enterprise - it ensures that entrepreneurs and private businesses can

use freely all the resources to produce their choice of goods and services

(can buy and sell as they choose)1

2. of choice - allows owners to do whatever is in their interest with their

property and money; workers can work where they like; consumers can

buy what they want.

3. Self-Interest - each economic units tries to achieve it’s own particular goal. -

- It is also the motivating force of economic units.

-Entrepreneurs try to maximize proﬁt of minimize loss.

-Property owners try to get the highest price for sale or rent of their resources

-Workers true to maximize their utility (satisfaction)

-Consumers they to obtain the products they want at the lowest price

4. Competition, requires the following:

1. Independently acting sellers and buyers operating in a particular product or factor

market. (no single buyer or seller is able to dictate the price of a product or factor.

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ECN 101

Chapter 2

Sept 14th

2. Freedom of sellers and buyers to enter or leave market, on the basis of their

economic self-interest. (helps the economy to remain ofﬁcial; enables the economy to adjust to

changes in consumer tastes technology, and factor availability)

3. Naturally occurs because of scarcity.

5. Market and Prices

-a market is an institution or mechanism that brigs buyers (demanders) and sellers (suppliers)

into contract

-the coordinating mechanism of capitalism is a system of markets and prices

-through this mechanism society decides: 1. what to produce 2. how to organize 3. how the

products are to be distributed

6. Technology and capital goods

- competition, freedom of choice, self-interest and a personal reward provide the motivation

and the opportunity for technological advance.

-Extensive use of technologically advanced capital goods held market economies achieve

greaser efﬁciency in production

-what drives ﬁrms to greater efﬁciency?

-Greater proﬁt:?

-Competition for consumers? yes, consumers always look for lower prices

7. Specialization - the use of resources of an individual, religion, or nation to produce one or a

few goods or services.

DIVISION OF LABOUR - contributes to a society’s output in several ways.

1. Specialization Makes use of Difference in Ability

2. Specialization Fosters Learning by doing

3. Specialization saves time

4. Geographic specialization - a central crops are better suited to some areas compared

to others.

USE OF MONEY

1. Medium of exchange - act of money

2. Barter - swapping goods for goods

3. Double coincidence of wants - both sides must want to exchange

ACTIVE BUT LIMITED GOVERNMENT

-market failures - gov can increase the overall efﬁciency of the economic system if thee are

market failures: over production go goods with social costs - i. e. pollution. The central gov,

along with the central bank, need to take action if a market

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Document Summary

Economic system - a particular set of institutional arrangements and a coordinating mechanism for producing good and services - to respond to the economic problem. It determines: 1. what goods are produced 2. who gets them 3. how to accommodate change 4. how to promote technological change it differs: 1. who owns the factors of production 2. the method used to motivate, coordinate and direct economic activity. Laissez-faire (let it be) capitalism - or pure capitalism - government"s role is limited to protecting private property, establishing a legal environment in which contracts can be enforced and ppl can interact in markets to buy and cell goods. Property (land, labour, capital) resources are privately owned. Markets and prices are used to direct and coordinate economic activities. The gov role is limited to protecting private property, and establishing a legal environment. The command system (socialism or communism) - when government owns most property resources and economic decisions are made according to a central plan.

Related Questions

1. The high economic growth from the Industrial Revolution was characterized by

a. new opportunities to settle empty areas, particularly North America.

b. rapid technological and scientific innovation.

c. the expansion of national governments in Europe and North America.

d. a rapid increase in the accumulation of human and physical capital.

e. none of the above.

2. Periods of economic growth and prosperity can often be explained by

a. political paradigm shifts.

b. technological innovation

c. movement of capital

d. both a and b

e. both b and c

3. Prior to the onset of economic reform in the late 1980s, the Soviet Union and

most Eastern European countries allocated resources primarily by means of

a. markets.

b. national economic plans.

c. neither a nor b.

d. both a and b.

4. A major theme in the 1980s in the governments of England and the U.S.was

a. the appropriate role of government in the economy.

b. the pressure for expanding trade with former socialist block countries.

c. repressing inflation.

d. increasing employment opportunities.

e. none of the above.

5. One example of the expansion of internationalism in the 1990s was the development of a trade agreement between Canada, Mexico, and the United States. This agreement is known as

a. the GATT (General Agreement on Tariffs and Trade).

b. the IMF (International Monetary Fund).

c. the NAFTA (North American Free Trade Agreement).

d. the CMEA (Council for Mutual Economic Assistance).

6. The contemporary Chinese economy is of interest because

a. it combines central planning with a multiparty democratic political system.

b. it combines the market with a multiparty democratic political system.

c. it combines the market with a single-party political system.

d. none of the above.

7. In the analysis of the planned socialist economic systems, the concept of economic reform is usually referred to as

a. the replacement of the plan by the market after the collapse of the planning system.

b. the attempt to improve the operation of the planned economy without a significant shift toward market arrangements.

c. the frequent attempt, in the planned socialist economic systems, to introduce the industrial policy.

d. none of the above.

8. The modern approach to defining economic systems

a. is based on the isms of capitalism and socialism.

b. emphasizes resource allocation arrangements over incentive systems.

c. defines economic systems according to a number of characteristics.

d. recognizes that defining economic systems is impossible.

e. none of the above.

9. Which of the following is not a major attribute of an economic system (Based on the textbook)?

a. Organization of decision-making arrangements.

b. Mechanisms for providing information and coordination.

c. Economic policies.

d. The system's physical and human capital.

e. Both c and d are correct.

10. A planned economy is one in which

a. subunits are coordinated by directives formulated by a superior agency.

b. subunits are not induced by appropriate incentives to carry out plan directives.

c. market allocation is combined with planned allocation.

d. a ministerial system prevails.

e. none of the above.

11. Property ownership rights include

a. disposition and utilization.

b. disposition, utilization, and the right to use the products and services generated.

c. disposition, utilization, and team production.

d. disposition, utilization, and economic incentives.

e. none of the above.

12. Consumer sovereignty means that

a. central planning is absent.

b. consumers elect public officials.

c. consumers make the basic decisions on what is to be produced.

d. consumers are not affected by advertising.

e. none of the above.

13. Which of the following is not a characteristic of market socialism?

a. Centralized decision-making.

b. Market allocation.

c. State or collective ownership.

d. Combination of moral and economic incentives.

e. All are characteristic of market socialism.

14. Two factors generally believed to be important in the analysis of levels of decision-making are

a. incentives and ownership.

b. authority and information.

c. level of economic development and ideological focus.

d. all of the above.

e. none of the above

15. Moral incentives generally refer to

a. direct money payments made to participants.

b. supplements to direct money payments, such as bonuses.

c. rewards that do not give the recipient greater command over goods and services but rather serve to reward desirable behavior.

d. all of the above.

e. none of the above

16. Principals and agents are different people. An agent is a party

a. who has controlling authority in an organization.

b. who acts on behalf of a principal.

c. with equity rights in the organization.

d. a and b are correct.

e. none of the above.

17. According to the text, opportunistic behavior occurs when a lower-level unit of an organization can use its information advantage against the interests of its superiors. This form of behavior, it is argued, can take two forms:

a. indicative planning and directive planning.

b. planners' preferences and consumer sovereignty.

c. moral hazard and adverse selection.

d. a and b are correct.

e. none of the above.

18. According to the text, there are two extremes of organizational structure. These extremes are termed

a. planned or market

b. corporate or individual proprietorship.

c. association based or hierarchy based.

d. a and c are correct.

e. none of the above.

19. It is often assumed that individuals who participate in the organized activity do so within the constraints of bounded rationality. The concept of bounded rationality

means that

a. individuals may not in fact pursue self-interest.

b. individuals face a variety of limitations, for example, in the ability to process information.

c. agents will never pursue goals or objectives set by principals.

d. b and c are correct

e. none of the above.

20. Modern comparative economists would object to the definition of economic systems only in terms of property ownership arrangements, because

a. they recognize that ownership arrangements are not important.

b. there is some private ownership of property in every economic system.

c. ownership arrangements are only one aspect of the economic system.

d. resource allocation procedures are much more important than property ownership.

e. all of the above.

amaranthhedgehog298

Question 26 pts

Which of the following is not a reason why specialization and trade are beneficial to society?

	Specialization fosters learning by doing, thus lowering the unit-costs of products
	Firms and workers become less dependent on others for producing goods and services

	The total output of economic goods may be increased even without any increase in resources
	Scarce resources are utilized more efficiently by exploiting differences among them

Question 27 pts

Laissez-faire capitalism limits the government's economic functions to the following, except:

	Protecting private property rights
	Establishing a legal environment to enforce contracts among individuals

	Setting prices of individual goods and services
	Preventing individuals and firms from coercing others

Question 28 pts

A production system where various workers concentrate on different specialized tasks to contribute towards a whole product is referred to as:

	Roundabout production
	A coincidence of wants

	Freedom of enterprise
	Division of labor

Question 29 pts

The market system is said to be characterized by "consumer sovereignty." This is because:

	A sovereign government determines which consumer goods will be produced
	Firms must match their production decisions to the consumers' choices

	The prices of consumer goods are regulated by a sovereign government
	Consumer goods are considered to be more important than capital goods

Question 30 pts

Consumers express self-interest when they:

	Seek the lowest price for a product
	Reduce business losses

	Exclude others in their thinking
	Collect economic profits

Question 311 pts

Refer to the above graph with three demand curves. An "increase in quantity demanded" would be illustrated by a change from:

	Point 5 to point 1
	Point 4 to point 1

	Point 2 to point 5
	Point 4 to point 6

Question 32 pts

The table below shows the weekly demand for hamburger in a market where there are just three buyers.

Refer to the above table. At a price of $6, the weekly market quantity demanded for hamburger is:

	17
	23

	24
	18

Question 33pts

If farmers withhold some of their current corn harvest from the market because they anticipate a higher price of corn in the near future, then this would cause a(n):

	Movement up along the current supply curve of corn
	Movement down along the current supply curve of corn

	Leftward shift in the current supply of corn
	Rightward shift in the current supply of corn

Question 34 pts

Which of the following will not cause the supply curve to shift?

	A technological change in the production of the good
	A change in the prices of other goods that producers could be producing

	A change in the costs of resources needed to produce the good
	A change in the price of the good

Question 35 pts

All of the following would affect the position of the supply curve for cranberries, except the:

	Price of agricultural land for cranberries
	Cost of fertilizers for cranberry production

	Popularity of cranberry drinks
	Development of a new pest control for cranberries

Question 36 pts

When high-school and college graduates apply for jobs in the labor markets,

	Job applicants and employers are both "buyers".
	Job applicants are the "sellers" while employers are the "buyers".

	Job applicants and employers are both "sellers".
	Job applicants are the "buyers" while employers are the "sellers".

Question 37 pts

Refer to the figure above, which shows three supply curves for corn. Which of the following would cause the supply of corn to shift from S₁ to S₂?

	A decrease in consumer incomes, assuming corn is a normal good
	The development of a more effective insecticide against corn rootworm

	An increase in the price of fertilizer
	A change in consumer tastes away from cornbread

Question 38 pts

Which is of the following statements is correct?

	If demand increases, then price will decrease
	If demand decreases, then price will decrease

	If price decreases, then demand will decrease
	If price increases, then demand will decrease

Question 39 pts

Which would be a likely cause of an increase in the demand for pizza?

	A decrease in the price of hamburger sandwiches
	A health report showing eating pizza reduces stress

	A reduced desire for take-out and fast-food dining
	A decrease in the prices of cheese, pepperoni, and mushrooms

Question 40 pts

A market for a product reaches equilibrium when:

	Price falls further after there is a shortage
	The price rises further after there is a surplus

	Buyers intend to buy a quantity equal to the quantity that sellers intend to sell
	The actual quantity bought by buyers equals actual quantity sold by sellers

Question 41 pts

A higher price reduces the quantity demanded for a product because:

	Individuals can afford less of the product and will switch to substitutes
	The financial assets of individuals increase

	Individuals will buy more of the product and less of its substitutes
	The purchasing power of individuals increases

Question 42 pts

The idea of the Law of Demand, as applied to electric cars, assumes which of the following to be constant?

	Price of electric cars
	How much sellers are charging customers for electric cars

	Price of gasoline cars
	Quantity of electric cars demanded by buyers

Question 43 pts

Use the following graph of the demand for coffee:

Refer to the above diagram of three demand curves for coffee. An increase in the price of coffee, other factors constant, would cause a:

	Movement from point a to point b
	Movement from point b to point a

	Shift from D₁ to D₂
	Shift from D₁ to D₃

Question 44 pts

Which of the following factors will decrease the current demand for a product?

	A decrease in the current price of a complementary product
	A decrease in the current price of a substitute product

	An increase in the current price of a substitute product
	An expected increase in the future price of the product

Question 45pts

In competitive markets, a surplus or shortage will:

	Cause shifts in the demand and supply curves that tend to eliminate the surplus or shortage
	Cause changes in the quantities demanded and supplied that tend to intensify the surplus or shortage

	Cause changes in the quantities demanded and supplied that tend to eliminate the surplus or shortage
	Never exist because the markets are always at equilibrium

Question 46 pts

Which of the following would cause a leftward shift in the supply curve for car washes?

	A decrease in taxes on car washes
	An increase in the price of car washing equipment

	A decrease in the price of water
	An increase in the number of cars in the city

Question 47pts

The market system automatically corrects a surplus condition in a competitive market by:

	Raising the price of the commodity in question while decreasing the quantity demanded
	Raising the price of the commodity in question while increasing the quantity demanded

	Reducing the price of the commodity in question while increasing the quantity demanded
	Reducing the price of the commodity in question while decreasing the quantity demanded

Question 48 pts

A leftward shift of the supply curve for oil in the United States is most likely to result from:

	A decrease in the world price of oil
	An increase in the costs of exploration and drilling for oil

	An increase in the subsidy for oil exploration and drilling
	A decrease in the fees that oil companies must pay for drilling licenses

Question 49 pts

A fall in the price of milk, used in the production of ice cream, will:

	Decrease the supply of ice cream
	Have no effect on the supply of ice cream

	Increase the supply of ice cream
	Cause a movement along the supply curve of ice cream

Question 50 pts

Refer to the above graph, which shows the market for beef where demand shifted from D₁ and D₂. The change in equilibrium from E₁ to E₂ is most likely to result from:

	An increase in the cost of cattle feed
	A decrease in consumer incomes

	A decrease in the tax on beef products
	An increase in the price of pork

ECN 101 Chapter Notes - Chapter 2: Consumer Sovereignty, The Incentive, Planned Economy

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