Exam 2: The Market System and the Circular Flow

Describe the three major virtues of a market system.

In the below circular flow diagram,the household and business sectors are labelled with arrows representing the flows of income and output labelled (a)through (f)and the two appropriate markets labelled (g)and (h).Supply the correct descriptive titles for each of these labels (a)through (h).

Explain the importance of self-interest in the operation of a market system.

List and describe the three main categories of businesses?

Describe the basic features of the circular flow model.

Describe three ways that the division of labour contributes to society's output.

"Every economy is based on 'planning' of one sort or another." Interpret and explain.

Provide examples of prominent Canadian corporations and describe the unique implications that arise due to the fact that such corporations are independent legal entities?

What are the economic advantages of the division of labour?

Explain why the market system is an organizing mechanism.

What is the relationship between businesses and households in the circular flow model?

"Competition is the mechanism that brings order out of potential chaos in a price-directed economy." Explain.

Explain what is meant by a command economy.

What factors determine who will get the output?

Describe two types of specialization in production.

How does the market system accommodate change in consumer's preferences?

Explain the two different motives that firms have for choosing the lowest-cost production methods to produce goods and services? The first motive is that because inefficiency drives up costs and lowers profits,any firm wishing to will make great efforts to minimize production costs.These efforts will include using the right mix of labour and capital,given the prices and productivity of those resources.They also mean locating production facilities optimally to minimize production and transportation expenses. The second motive is due to competition,consumers strongly prefer low prices and will shift their purchases over to the firms that can produce a quality product at the lowest possible price.Any firm foolish enough to use higher-cost production methods will go bankrupt as it is undersold by its more efficient competitors who can still make a profit when selling at a lower price.In other words,competition eliminates high-cost producers,and so firms are motivated to choose the lowest-cost production methods to produce goods and services.

What is meant by the guiding function of prices?

One of the characteristics of a modern market economy is an "active,but limited,government." How can the government "help" the economy?