a. Self interest is one of the driving forces in a market system. Entrepreneurs try
to maximize profits or minimize losses; resource suppliers try to maximize
income; consumers maximize satisfaction.
b. As each tries to maximize profits, inc
A. Emphasis: The percentages changes are compared, not the absolute changes.
a. Absolute changes depend on choice of units. For example, a change in the
price of a $10,000 car by $1 and is very different than a change in the price of
a $1 can of beer by $
Econ 302 week 4
Price Elasticity of Demand
A. Law of demand tells us that consumers will respond to a price decrease by buying
more of a product (other things remaining constant), but it does not tell us how much
B. The degree of responsiveness or s
1. Which is not one of the Five Fundamental Questions?
A. How will the goods and services be produced?
B. How should the system accommodate change?
C. Who is to receive the output of the system?
D. What goods and services should be produced by government?
1. Which statement best describes a command economy?
A. The production of goods and services is determined primarily by markets, but the
allocation of goods and services is determined primarily by government
B. The production of goods and services is dete
b. Businesses buy resources in order to produce goods and services.
c. Flow of payments from businesses for the resources constitutes business costs
and resource owners incomes.
3. What happens in the product markets?
a. Households are on t
1. The Demise of the Command Systems
Command systems in the Soviet Union, Eastern Europe, China eventually gave way to
The failure of command systems can be attributed to two main
A. Coordination problem it was difficult (if not
1. . Markets are dynamic what is efficient today may not be efficient tomorrow as tastes,
technology, and resource supplies change. Prices help signal those changes.
2. An increase in demand for some products (fruit juice) will lead to higher prices in
A. the five fundamental questions must be answered by all economic systems.
1. What goods and services will to be produced?
2. How will the goods and services be produced?
3. Who will get the output?
4. How will the system accommodate change?
5. How will
There are several determinants of the price elasticity of demand.
1. Substitutes for the product: Generally, the more substitutes, the more elastic the
2. The proportion of price relative to income: Generally, the larger the expenditure