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Chapter 2: Economic Systems Answer Key

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Types of Economies
#1 What type of economy does the U.S. have? Free Market economy; Economis System: Capitalism
#2 Who determines what and how much to be produced in free market economies? The Market (sellers and buyers)
#3 Who makes all of the decisions in a command economy? The government/central planners
#4 What 2 types of economies are combined in a mixed economy? Market and Command
#5 How are prices determined in a market economy? They are based on supply and demand
Supply and Demand
#1 What is the Law of Supply? As the price goes up, the quantity of supply goes up OR As the price goes down, the quantity of supply goes down
#2 What is the Law of Demand? As the price goes up, the quantity of demand goes down OR As the price goes down, the quantity of demand goes up
#3 At what point do Supply and Demand intersect? Equilibrium point or market price
#4 Why do surpluses occur? The firm is charging too much for their product
#5 If a new diet supplement comes out, and proves to be highly effective, what will most likely happen? The demand will increase
Capitalism
#1 Who is the founder of Capitalism? Adam Smith
#2 Capitalism is based on.....? Free Enterprise/Freedom to establish businesses and make profit
#3 What does the invisible hand mean? People's desire for self-gain will benfit the entire society/No government intervention
#4 What is the main disadvantage of capitalism? Greed and selfish pursuit of profit
#5 What are businesses motivated by in capitalistic systems? Profit
Competition
#1 What is an oligopoly? Market with a few, large firms
#2 How are prices set in a monopoly? The company that own the product sets the price
#3 If a grocery buys a dairy farm, what type of merger is that? Vertical Merger
#4 How are prices set in a perfectly competitive market? By supply and demand
#5 Do you think that monopolies are a good idea? Why or why not?
Socialism
#1 Socialism is an the example of -------economic system. a command based
#2 What is the major concern of socialist systems? Social equality provided by government intervention
#3 What are the major disadvantages of socialism? lack of entrepreneurship and brain drain and high taxes
#4 What is the basic advantage of socialism? Mostly free government services for the citizens and perception of social equality
#5 What is the difference between capitalism and socialism? Capitalism -free enterprise socialism government controlled economy to create social equality
Final Question