Introduction and Free-Market Model

Question 1

In an economic context, what makes up compensation?

Answer 1

Payments to individuals as:

1. wages, salaries, and profit sharing for labor
2. interest, dividends, rental and lease payments for capital
3. rental, lease and royalty payments for natural resources

Question 2

What determines “price”?

Answer 2

The supply of and demand for the commodity being priced.

Question 3

List the characteristics of a free-market economy.

Answer 3

1. Interdependent relationship between individuals and business firms
2. Production depends on preferences of individuals with ability to pay for goods and services
3. Production depends on availability of economic resources, level of technology, and how business firms choose to use them
4. Production depends on sale price being at least equal to production cost.

Question 4

Describe the relationship between economic resources and compensation in a free-market economy.

Answer 4

Business firms acquire economic resources from individuals (labor, capital and natural resources), who receive compensation in return (wages/salaries, rents, interest, dividends, etc,); individuals use this compensation to acquire goods and services produced by businesses.

Question 5

List the types of economic resources.

Answer 5

Acquired from individuals as:

1. Labor: human work, skills, and similar human effort
2. Capital: financial resources (e.g. savings)
3. Natural Resources: land, minerals, timber, water, etc.