Study questions

1. Explain each of the following statements:

a. The market system not only accepts self-interest as a fact of human existence, it relies on self-interest to achieve society's material goals.

b. The market system provides such a variety of desired goods and services precisely because no single individual or small group is deciding what the economy will produce.

c. Entrepreneurs and business are at the helm of the economy, but their commanders are consumers.

2. Why is private property, and the protection of property rights, so critical to the success of the market system?

3. What are the advantages of "roundabout" production? What is meant by the term "division of labour"? What are the advantages of specialization in the use of human and material resources? Explain: "Exchange is the necessary consequence of specialization."

4. What problem does barter entail? Indicate the economic significance of money as a medium of exchange. What is meant by the statement "We want money only to part with it"?

5. Evaluate and explain the following statements:

a. The market system is a profit-and-loss system.

b. Competition is the indispensable disciplinarian of the market economy.

c. Production methods that are inferior in the engineering sense may be the most efficient methods in the economic sense, once resource prices are considered.

6. Explain the meaning and implications of the following quotation.

The beautiful consequence of the market is that it is its own guardian. If output or prices or certain kinds of remuneration stray away from their socially ordained levels, forces are set into motion to bring them back to the fold. A curious paradox thus ensues: the market, which is the acme of individual economic freedom, is the strictest taskmaster of all. One may appeal the ruling of a planning board or win the dispensation of a [government] minister; but there is no appeal, no dispensation, from the anonymous pressures of the market mechanism. Economic freedom is thus more illusory than at first appears. One can do as one pleases in the market. But if one pleases to do what the market disapproves, the price of individual freedom is economic ruination.1

7. Suppose the demand for bagels rises dramatically while the demand for breakfast cereal falls. Briefly explain how the competitive market economy will make the needed adjustments to re-establish an efficient allocation of society's scarce resources?

8. KEY QUESTION Some large hardware stores, such as Canadian Tire, boasts of carrying as many as 20,000 different products in each store. What motivated the producers of those products—everything from screwdrivers to ladders to water heaters—to make them and offer them for sale? How did the producers decide on the best combinations of resources to use? Who made those resources available, and why? Who decides whether these particular hardware products

1Robert L. Heilbroner, The Worldly Philosophers, 7th ed. (New York: Simon & Schuster, 1999), pp. 57-58.

Part One • An Introduction td Economics and the Economy should continue to get produced and offered for sale?

9. In a single sentence, describe the meaning of the phrase "invisible hand."

10. What divergences arise between equilibrium output and efficient output when (a) spillover costs and (b) spillover benefits are present? How might government correct for these divergences? "The presence of spillover costs suggests the underallocation of resources to a particular product and the need for governmental subsidies." Do you agree? Why or why not? Explain how zoning and seat belt laws might be used to deal with a problem of spillover costs.

11. KEY QUESTION What are the characteristics of public goods? Explain the significance of the exclusion principle. By what means does government provide public goods?

12. KEY QUESTION Draw a production possibilities curve with public goods on the vertical axis and private goods on the horizontal axis. Assuming the economy is initially operating on the curve, indicate how the production of public goods might be increased. How might the output of public goods be increased if the economy is initially operating at a point inside the curve?

13. Use your understanding of the characteristics of private and public goods to determine whether the following should be produced through the market system or provided by government: (a) bread; (b) street lighting; (c) bridges; (d) parks; (e) swimming pools; (f) medical care; (g) mail delivery; (h) housing; (i) air traffic control; (j) libraries. State why you answered as you did in each case.

14. (The Last Word) Why do private markets fail? In your answer, refer to the dwindling cod stocks on Canada's east coast.

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  • richard
    What motivated the producers to offer products for sale?
    8 years ago
  • Edda
    What is meant byy the statement "We want money only to part with it"?
    8 years ago
  • Mulu
    What are the advantages of specialization in the use of human and material resources?
    8 years ago
  • suoma
    What motivated the producers of those individual products to make them and offer them for sale?
    8 years ago
  • Sandra
    What are the advantages of "roundabout" production?
    8 years ago
  • Tyyne
    What problem does barter entail indicate the economic significance?
    8 years ago
  • Kristiina
    How competitive market economy will make the needed adjustments?
    8 years ago

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