2.2 Free Markets

Why do markets exist?

• to allow people to exchange goods and services
• to allow people to earn money
• to increase profits for business owners
• to concentrate the productive efforts of individuals

According to the circular flow model of a market economy, firms buy factors of production from households, then

• use these factors to eliminate competition.
• use these factors to produce goods and services.
• sell factors of production to households.
• sell free markets to households.

What role does competition among producers play in a free market?

• It forces consumers to pay high prices for what they want.
• It causes firms to produce what consumers want while moderating prices.
• It encourages firms to produce goods consumers would never demand on their own.
• It allows firms to produce what consumers want while increasing prices.Check Answer

Why does a free market economy result in the availability of a wide variety of goods and services?

• because markets reward producers who can produce a large variety of products
• because consumers have incentives to meet producers’ desires
• because producers have incentives to meet consumers’ desires for variety
• because the government tells producers what to make

Where in the circular flow model does a new car on display in an auto dealer’s showroom belong?

• Factor market, monetary flow
• Factor market, physical flow
• Product market, monetary flow
• Product market, physical flow

Where in the circular flow model does a paycheck belong?

• Factor market, monetary flow
• Factor market, physical flow
• Product market, monetary flow
• Product market, physical flow

Which of the following describes the benefits of specialization in a free market?

• Specialization leads to higher prices.
• Specialization leads to decreased competition among producers.
• Specialization leads to lower overall output.
• Specialization leads to efficient use of capital, land, and labor.

How do self-interest and competition affect free markets?

• They work together to keep prices high.
• They work together to regulate supply, demand, and prices.
• They represent the opposing interests of consumers and producers.
• They help level the playing field between efficient and inefficient producers.

Which of the following is an explanation of what Adam Smith called the "invisible hand" of the marketplace?

• Advertising causes consumers to desire products that they otherwise would not want.
• Government regulations influence the decisions of consumers and producers in the market.
• Self-interest, competition, and incentives promote smoothly running markets.
• Unforeseen events disturb supplies of goods and services and affect prices in the marketplace.

Key advantages of free market economic systems include

• rising prices, specialization, negative incentives, and multiple markets.
• online markets, producer sovereignty, self-interested consumers, and low prices.
• economic efficiency, economic freedom, economic growth, and variety of goods.
• positive incentives, negative incentives, specialized consumers, and efficient labor.