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40 views

1.4.3 test

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emma.wright459
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1.4.

3 Test (TST): Fundamental Principles of Economics Test

Economics Name: Emma Wright

Points Possible:40
Date: 10/14

Part I: Short-Answer Questions (20 points)

1. Scarcity, also known as the basic problem of economics, is the result of the combination of

two factors. Identify and briefly describe these two factors, and explain how together they

contribute to scarcity. The two factors that contribute to scarcity are limited resources and

unlimited wants. These two factors create scarcity because people have unlimited things they

want, but resources are limited. People will need to make smart choices on what they want and

how to conserve resources.

2. Individuals, businesses, and governments make economic decisions by considering two

important factors. Identify and define these two factors, and give an example of each. The two

important factors are cost and benefit. Cost refers to the value you give up when you choose

one economic activity over the next best economic activity. For example, a consumer typically

equates cost with the price of a good (such as a loaf of bread, a pair of shoes, or a car) or a

service (such as a haircut or a night in a hotel). Benefit refers to the gain that is received from

producing or consuming a good or service. It can be in terms of happiness, utility or profit. For
example, buying a new car can give happiness, having a reliable vehicle, getting a good deal, or

maybe even safety of the new car.

3. Describe the impact of scarcity on economic decision making. What happens when products

and resources become less available? How might this affect the incentives or trade-offs

involved in a person's economic decision making? (4 points) Scarcity plays a big role in the

decision making for the economy because it creates incentives, influences trade-offs, and

drives innovation. As prices rise, businesses have a greater incentive to find substitutes and to

conserve resources. Scarcity forces businesses to make trade-offs, choosing to allocate their

limited resources to the most valuable uses.

4. Briefly explain economist Adam Smith's positions on these three subjects: the freedom of

markets, the true source of wealth, and the division of labor. (4 points) Adam Smith believed

that the freedom of markets was essential for economic growth. He believed that this

economic policy was foolish and actually limited the potential for "real wealth," which he

defined as "the annual produce of the land and labor of the society." The main cause of

prosperity, argued Smith, was increasing division of labor. Smith gave the famous example of

pins. He asserted that ten workers could produce 48,000 pins per day if each of eighteen

specialized tasks was assigned to particular workers. Average productivity: 4,800 pins per

worker per day.


5. Describe the overall involvement of the government in the free enterprise system of the U.S.

economy. Then, identify three specific areas where the government plays an important role, and

give an example of each. (4 points) The overall involvement of the government is: Providing

public goods, enforcing contracts, and regulating markets. The government provides goods

such as roads, bridges, and national defense. The government enforces contracts between

businesses and individuals. This helps to ensure that businesses can operate in a stable

environment. The government regulates markets to protect consumers and workers. For

example, the government sets safety standards for workplaces.

Part II: Application and Critical Thinking (20 points)

6. While each country in the world has a unique economic system, all systems fall into four main

categories:

● Traditional

● Command

● Market

● Mixed
System Production: What, how, Strengths Weaknesses
who

Traditional A traditional The benefits of The


economy means a traditional disadvantages
an economic economy are the lack of a
system where that
include less work-life
is influenced by
traditions,
environmental balance, poor
customs and destruction and production
beliefs in shaping a general efficiency, and
the production of understanding lack of a variety
goods and of the way in of jobs and
services. In this which skills.
economy, family
resources will
members can
produce things
be distributed.
since it is based
on tradition.
Command In a command Because a Command
economy, the command economy
government economy is disadvantages
controls and centrally include a lack of
steers major planned, its competition,
aspects of pros include which can lead
economic efficiency, to a lack of
production. The theoretical innovation and
government equality efficiency.
decides the between
means of citizens, a focus
production and on the common
owns the good rather
industries that than profit, and
produce goods low or
and services for non-existent
the public. unemployment.
Market Most commonly, Consumers Disadvantages
market have a wide of Market
economies variety of Economy:
feature products to Inequality,
government choose from. Externalities,
production of
Innovation is Public Goods,
public goods,
encouraged Merit Goods,
often as a
because of the Demerit Goods,
government
profit motive and Market
monopoly.
and self-interest Failures.
of the market
participants.
Competition
ensures better
quality
products,
hard-working
labor, and
hence overall
high efficiency.
Mixed Mixed Some Some
economies advantages of a disadvantages
typically accept mixed economy of a mixed
private are capitalism, economy are
ownership of supply and government
most means of
demand and the regulation, and
production, with
free market. excessive
some
taxation.
government
intervention,
mainly through
regulations.
The United States has a mixed economy known as the free enterprise system. Choose one of

the three other economic systems and imagine that the U.S. government has decided to make

fundamental changes to the economy in order to fully adopt this other system. In your

paragraph, describe what you see as the benefits and drawbacks of the change. Would the

economy thrive, or suffer? How, in your opinion, would the American people react to this

change? Why do you think so? (20 points)

America will switch into a command economy. In a command economy the government will

pretty much control all aspects of the economy. Benefits of them transitioning into the

command economy could be a change in income inequality, because the government would

prioritize people getting an equal distribution of pay and benefits. The government could

probably also tackle issues like global warming and unemployment. Some disadvantages could

be the lack of competition could lead to shortages and there being no innovation. There also

would be no freedom for the economy because the government took control. The Americans

may feel discouraged and have a hard time adapting to the command economy because having

a mixed economy gives freedom for your own business and getting to regulate things on your

own terms. With a command economy, it will restrict any personal choices and the government

will make all choices for the economy/businesses. Americans may even show resistance to

government control because Americans are used to freedom and then they get stripped of it. I

don’t know if the economy would thrive I feel with such a sudden change the citizens will be

outraged and may not abide with the government and could make the economy suffer.

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