1. Decide whether each of the following descriptions most closely corresponds to being part of a command system, a market system, or a laissez-faire system. LO1 Command System – A woman who wants to start a flower shop finds she cannot do so unless the central government has already decided to allow a flower shop in her area. Market System – Shops stock and sell the goods their customers want but the government levies a sales tax on each transaction in order to fund elementary schools, public libraries, and welfare programs for the poor.
Laissez – faire System – The only taxes levied by the government are to pay for national defense, law enforcement, and a legal system designed to enforce contracts between private citizens.
2. Why is private property, and the protection of property rights, so critical to the success of the market system? How do property rights encourage cooperation? LO2 In the market system, private individuals and firms, not the government, own most of the property resources.
It is this extensive private ownership of capital that gives capitalism its name. This right of private property, coupled with the freedom to negotiate binding legal contracts, enables individuals and businesses to obtain, use, and dispose of property resources as they see fit. The right of property owners to designate who will receive their property owners to designate who will receive their property when the die helps to sustain the institution of private property. If private property was not protected the strong could take from the weak without compensation.
Property encourage cooperation by encouraging investment, innovation, exchange, maintenance of property and economic growth. 3. What are the advantages of using capital in the production process? What is meant by the term “division of labor”? What are the advantages of specialization in the use of human and material resources? Explain why exchange is the necessary consequence of specialization. LO2 Advanced technology and capital goods are important because the most direct methods of production are often the least efficient. The only way to avoid the inefficiency is to rely on capital goods.
There are huge benefits to be derived from creating and using such capital goods Division of labor is the separation of work required to produce a product into a number of different tasks that are performed by different workers; specialization of workers. The advantages of specialization is it makes use of differences in ability, fosters learning by doing, and saves time. All these advantage reasons for specialization increase the total output society derives from limited resources. Specialization promote exchange through geographic specialization. Whatever the product is to that is exclusive is traded with another company of a different geographic region. Both geographic get the desired product without having to pay the high cost it would take to make the product themselves.