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ECON 102 > Exam-1 Chapter 3 Global Economic System > Flashcards

Exam-1 Chapter 3 Global Economic System Flashcards

1
Q

What are the basic economic questions?

A

What to produce?
How to produce?
Who benefits?

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2
Q

Economic system

A

A method of answering the three questions is called the economic system.

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3
Q

There are two primary economic systems in use today

A

Capitalism and socialism

No country is hundred percent of either.

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4
Q

A country with the features of both capitalism and socialism is called

A

Mixed economy

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5
Q

Capitalism requires

A

Private ownership of capital.

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6
Q

The questions and capitalism are answered by

A

The use of markets

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7
Q

What is the guiding motivation in capitalism?

A

Self-interest

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8
Q

Socialism

A

Socialism relies on the government ownership of capital, planning as the allocation mechanism of markets and social interest motivations

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9
Q

Markets are

A

Voluntary

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10
Q

Market provide incentives to both

A

The buyers and sellers because they can gain from exchange

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11
Q

Markets also promote

A

Efficiency and innovation by businesses trying to maximize their profits

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12
Q

Workers also have an incentive to be efficient

A

Because their compensation should be based on their production

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13
Q

Decision making in capitalism is

A

Decentralized

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14
Q

In a planned economy Who makes all the decisions?

A

Government agency

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15
Q

Why do incentives in planned economies different from those in capitalism

A

Since the society, not the individual, stands to gain from individual efforts.

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16
Q

Why do markets fail?

A

Markets failed because of several reasons factors notably public goods , externalities, asymmetric information, and monopoly power.

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17
Q

Public goods

A

Are nonexclusive a non-rivalrous.

They are under produced by markets because people can free ride.

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18
Q

When do externalities occur?

A

When a transaction brings cost or benefits to someone other than those directly involved in the transaction.

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19
Q

Name two types of externalities

A

Externalities can be either positive or negative and can result in either over or under production of a good.

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20
Q

Asymmetric information

A

Occurs hen either the buyer or seller knows important information about an exchange that the other does not.

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21
Q

Asymmetric information can result in

A

Goods being wrongly priced or withdrawn from markets

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22
Q

When does monopoly power exist?

A

Monopoly power exist when markets are insufficiently competitive.

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23
Q

What are the results of monopoly power?

A

It may result in higher prices and inefficiency.

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24
Q

When does monopsony exist?

A

When there is one buyer of a good, it allows the monopsonist to influence prices paid.

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25
Q

What to produce?

A

Each country must choose what gets to produce with its resources.

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26
Q

How to produce?

A

Figure out steps to decide how best to produce

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27
Q

Who benefits?

A

This question is sometimes stated “for whom “the income tolls.
Or Who gets it?

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28
Q

England is mostly

A

Capitalism, but it has a large government and does some things because of traditions.

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29
Q

What are the two primary economic framework at work in the modern world?

A

Capitalism and socialism

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30
Q

When we say our economy is a mixed capitalism what does it mean?

A

Having elements of both capitalism and socialism plus pieces that are technically neither.

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31
Q

Capitalism in an economic system is characterized by

A

Private ownership of capital
Market Allocation
Self interest motivations

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32
Q

Capital

A

Capital is human made goods that are used to make other goods such as factories machinery trucks and airplanes

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33
Q

In a capitalist system who is allowed to own the capital and keep the money that it earns?

A

Private citizens

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34
Q

The owners of capital in capitalism

A

Are going to be high income folks

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35
Q

Market

A

If Market is a place where buyers and sellers come together to negotiate exchanges of Goods.

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36
Q

In capitalism, who decides what is made, how it is made and who gets the income?

A

The markets

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37
Q

Markets to not require

A

One on one negotiations

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38
Q

In markets there is a negotiation,

A

But it is a group negotiation that shows itself in where consumers shop and how much they buy

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39
Q

What is another name for capitalism

A

The price system

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40
Q

Who creates prices?

A

Markets create prices, and those prices give us the information we use to make our choices

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41
Q

There are markets for

A

More than consumer goods

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42
Q

In a capitalist system, people and businesses

A

Are supposed to do what they think is best for themselves, to be motivated by their own interest. This does not mean that capitalism ignores the social good, rather it means just the opposite.

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43
Q

The great British economists Adam Smith

A

Established the theoretical foundation of capitalism. In his theory, people who pursue their own interest will be led to do what’s best for society.

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44
Q

Capitalism provides an incentive for

A

People to work hard, to try their best, because they stand to be rewarded for doing so.

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45
Q

Socialism is an economic system characterized by

A

Government ownership of capital
Planned allocation
Social interest motivations

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46
Q

In a socialist system

A

The government owns the capital and in theory uses it for the benefit of all .

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47
Q

The answers to the basic economic questions in socialism comes from

A

The use of planning

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48
Q

Planned systems are sometimes called

A

Command economies, because economic activity is at the command of the government.

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49
Q

Socialism demands that

A

People do what is best for the society, not what is best for themselves as individuals.

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50
Q

Karl Marx wrote that

A

The system required each person to give according to his or her ability, but to be rewarded according to his or her needs.
So you do the right thing such as working hard without regard to what’s in it for you.

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51
Q

No country in the world is gone by one of the economic systems.

A

True

52
Q

The United States is

A

Mostly a capitalist country, the government still limits or prohibits the production and sale of goods.

53
Q

The United States is an example of

A

Mixed capitalism.

54
Q

Mixed capitalism

A

Most economic activity is market-based capitalism, but there is direct government production of goods and services, and government regulation of the private sector production.

55
Q

What are markets about

A

Markets are about buyers and sellers, and their negotiations

56
Q

In a competitive market

A

No buyer is forced to buy, no seller is forced to sell.

57
Q

Markets make both

A

The buyers and sellers better off, because exchanges are voluntary. Buyers part with the money only when they value what they get more than their money, and seller sell only when the money they receive is worth more to them than the goods they have.

58
Q

we believe that a number of mistakes made in a capitalist system

A

is smaller than the number of mistakes made in other systems and that the consequences of those mistakes are smaller as well

59
Q

The power of markets is enhanced by the fact that

A

Markets have built-in incentives for the buyers and sellers

60
Q

What incentives to consumers have in a market?

A

They are determined to maximize their utility, so they have an incentive to shop around -a good consumer will know what products are available and what the prices are before they make a choice.

61
Q

The buyers behavior of shopping for the best deal creates a

A

Positive incentive to the seller to provide a better deal than the competitor.

62
Q

In a competitive market

A

No seller is assured of having their goods purchased

63
Q

Innovation

A

Innovation is the creation or invention of newgoods and services or new ways of operating a business

64
Q

In a market driven economic system

A

Innovation occurs automatically as a consequence of the normal incentives of markets.

65
Q

The maximum output of society is always

A

Limited

66
Q

Why are Market based economies naturally strong?

A

Because each business has an incentive to use the minimum amount of resources required to produce its products, leaving the maximum amount of resources available for other businessesl to use in production.

67
Q

A market-based economic should naturally be efficient in its use of

A

Resources – land labor and capital

68
Q

Markets and workers efficiency

A

If wages are determined in the marketplace, the most valuable worker will receive the highest pay

69
Q

What to market say to workers?

A

To be efficient, work hard, and you will be rewarded.

70
Q

Markets are

A

Decentralized

71
Q

Decentralized

A

Means there is no single person or institution that makes decision for everyone.

72
Q

Why do markets work so well?

A

Because there are so many of them

73
Q

When one person makes a mistake

A

It’s effects on minimized because the span of the decision is small and competitors are waiting and willing to take advantage.

74
Q

Capitalism is a system based on

A

The power of markets

75
Q

Advantages of capitalism and markets

A

Incentives for efficient production by each firm.
Decentralization of decision-making
Incentives for innovation
Individual behaviors that work towards maximizing the output and efficiency of the entire nation.

76
Q

Planning

A

Planning in a national sense, means that someone or some group of people in the government determine the answers to some or all of the basic economic questions what to produce, how to produce and who benefits.

77
Q

In a market system the answers to the three basic questions are made

A

On a decentralized basis by millions of people

78
Q

How does the planned economy work?

A

Typically, a central planning agency that is part of the national government creates a plan for the economy.

79
Q

The centralized nature of decision-making creates

A

A complex and fragile system with many single points of failure.

80
Q

In a planned economy, the firm

A

Is told what to do.it’s incentive is meeting the goals set for it in terms of producing a certain amount of output.

81
Q

In a planned system,workers are

A

Typically paid a fixed wage, regardless of their work effort.

82
Q

In a planned economy what things will a consumer know?

A

Quailty is likely to be poor and lines are likely to be long.

83
Q

The planned economy

A

Because it lacks incentives, and its decision making is centralized, the planned economy is going to be inefficient compared to the market based economy.
A planned economy is unlikely to be innovative or in any meaningful way responsive to its consumers.

84
Q

Why do some people still favor the planned economy?

A
  1. there are times when markets don’t work well and some form of planning is required.
  2. There are people who dislike market-based outcomes because they are uneven in the rewards they create.
  3. A planned economy might provide more equal distribution of income across the population.
  4. The idea of people placing the greater good of the society above their own interest is also compelling to some people.
85
Q

Do United States and all of the countries are mixed economies

A

With elements of Market and elements of planning interwoven

86
Q

Just as in a planned economy, the mixed economy also requires that

A

Your success is based on your ability to meet your quota of production and your success outside is based on your ability to understand and manipulate the system

87
Q

What are the four causes of market failure?

A

Public goods
Externalities
asymmetric information
monopoly power

88
Q

Market failure can sometimes be overcome by

A

Planning

89
Q

However one of the more interesting topics of modern economics is

A

finding Market solutions to the problems of market failure

90
Q

Public goods

A

A public good is both non-rivalrous and nonexclusive.

Example National defense, the army, the Navy, Air Force

91
Q

A good is considered to be exclusive when

A

You pay to get them

92
Q

A good is considered to be rivalous

A

When once consumed by me, it cannot be consumed by others.

93
Q

Why are public goods considered an example of market failure?

A

Because public goods always create free riders

94
Q

Free riders

A

People who want a good to be produced, but expect to benefit by consuming it without having to pay.

95
Q

The only way Economists know to produce enough of a public good is

A

For it to be produced by the government, which can make each person pay their share.

96
Q

Forced riders

A

Someone who shares a pay of the cost of a public good but does not share the benefits.

97
Q

Common property resource

A

Is something that is jointly owned by all .

For example the fish in the ocean, the trees ,the rivers, Buffalo etc

98
Q

In what way can we protect the common property resource

A

Through group action, either the government or people working together to protect the resource

99
Q

Externalities

A

And externality occurs when a choice by one party creates cost or benefits for another party who is not part of the decision that resulted in the choice.

100
Q

Types of externalities

A

Negative externality example lack of hygiene

Positive externality example city builds a park next to your house which will increase the value of your house.

101
Q

When a person makes a choice

A

There are cost and benefits to them, which we call the private cost and benefits.

102
Q

Social cost and benefits

A

The total of all cost and benefits to everyone are called the social costs and benefits.

103
Q

Market works correctly when

A

The private cost and benefits are equal to the social cost and benefits

104
Q

The market fails when

A

There is a difference between the private and social cost of benefits

105
Q

When a negative externalities exist from a good

A

More of it will be produced than is socially optimal because the buyers of the good pay less than the true social cost of the good. So the market has failed.

106
Q

When positive externalities exist

A

Goods are under produced

107
Q

Example of positive externalities

A

education

108
Q

How are externalities resolved

A

Externalities are often resolved by government intervention example environmental laws or lawsuits decided in court to make the private person pay the social cost, which is called internalizing the externality.

109
Q

In a competitive market

A

Buyers and sellers get together and negotiate an exchange for a price

110
Q

When does asymmetric information occur?

A

When either the buyer or seller has more information about the transaction than the other

111
Q

What are the problems caused by asymmetric information

A

Adverse selection

Moral hazard

112
Q

Adverse selection

A

Is the idea that some goods may not get to the market at all because the seller assumes that they cannot get a fair selling price for them.

113
Q

When does moral hazard occur

A

When the seller is ignorant of the true intentions or nature of the buyer.

114
Q

How can asymmetric information problems be solved?

A

Through signaling

115
Q

Signaling

A

It occurs when the buyer or seller sends additional information or provides some form of assurance that the good being bought or sold is as advertised.
Example provide a warranty to the buyer

116
Q

Unless the buyers and sellers can get the information they need, either directly or by special signaling that takes place,

A

The market will not work correctly and Either the transaction will not take place or goods will be under valued

117
Q

Not all markets are

A

Competitive.

118
Q

Monopoly power

A

When the seller has a degree of power over the market

119
Q

A monopoly exist when

A

There is only one seller of a good

120
Q

Where competition is strong, no seller can demand exorbitant prices

A

Because consumers will switch to another seller

121
Q

Monopoly power can create market failure

A

Because it destroys the incentives we associate with markets

122
Q

True monopoly lacks any incentive for efficiency or quality

A

Because consumers have no alternatives

123
Q

Where monopoly power exists

A

We expect higher prices, lower quality and less efficiency

124
Q

For those few forms that have strong monopoly power, the government usually solves the problem

A

But either regulating the firm or taking legal action against it

125
Q

The flipside of monopoly power is

A

Monopsony

126
Q

When does Monopsony occur

A

When there is only one buyer of a good

127
Q

Where Monopsony occurs , the most common response is

A

For the workers to join a union, which then becomes a monopoly selling labor to the firm.

ECON 102 (18 decks)

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