Chapter 7- Section 2 Flashcards Preview

Economics > Chapter 7- Section 2 > Flashcards

Flashcards in Chapter 7- Section 2 Deck (14)
Loading flashcards...

What four conditions must be met to have a free enterprise economy?

1) Adequate competition must exist in all markets. 2) buyers and sellers must be reasonably well-informed about conditions and opportunities in these markets. 3) resources must be free to move from one industry to another. 4) prices must reasonably reflect the costs of production, including the rewards of entrepreneurs.


What happens when four conditions are altered in the free enterprise structure?

Market Failure


Inadequate competition, inadequate information, resource immobility, external economies, and public goods lead to...

Market failures


Inefficient competition tends to curb what?

Use if scarce resources


Higher prices and reduced output lead to...

Artificial shortages that cause higher prices


Inadequate competition may enable a business to influence what?



Can inadequate competition apply to both sides of the market? (Demand and supply)

Yes, demand can be affected for certain products such as tanks and war machines because there are a limited number of buyers


If knowledge thy is important to buyers but is difficult to obtain, it results in...

A market failure


Resource immobility means...

Land, capital, labor, and entrepreneurs do not move to markets where returns are the highest


In intended side effect thy either benefits or harms a third party not involved in the activity that caused it



The harm, cost, or inconvenience suffered by a third party because of actions by others

Negative externality


Benefit received by someone who had nothing to do with the activity that generated the benefit

Positive externality


Externalities are classified as market failures, why?

Because their costs and benefits are not reflected in the market prices that buyers and sellers pay for the original product


Products that are collectively consumed by everyone, and whose by one individual does not diminish the satisfaction or value available to others

Public goods