Free-Response Questions

1. Scarcity and Economic Systems

A. Define scarcity. (3 points)

Scarcity is when the amount of a particular item is not enough to satisfy the desire for it.
Having limited resources.

B. What are the three questions that every society must face because scarcity exists? (3 points)

What to produce?
How to produce?
For whom or consume to produce?

C. Briefly describe the three main categories of economic systems that answer the three
questions that arise from scarcity. (6 points)

Traditional economy- The economic decisions are decided on customs and religion
Market economy- Economic decisions are based upon the interactions of people
Command economy- The government makes the economic decisions

D. What are the four goals of most economic systems? (4 points)

Having efficient use of resources, having stable prices, having full employment,
And having an economic growth

E. Explain how economists define capital. What are two types of capital? (4 points)

Economist define capital as the factor of production of a good that includes factories,
machinery, tools,computers, buildings, and human capital

Human Capital & Physical Capital

F. How is the price of a good or service determined in a market system? (2 points)

The price is determined by how much a buyer or an individual can and is willing to pay
and also by how much the vendor wants for the item. It all depends in the interaction
between the buyer and the vendor

G. What is a free good? Give an example of a free good. (2 points)

A free good is a resource that is abundant that the availability of it does not affect the
value or economy. An example of a free good is the air we breathe, everybody uses it.
2. The Economy and the Government

A. What is a laissez-faire economic policy? (3 points)

The laissez-faire economic policy is a policy when the government is only allowed to
interfere with economic affairs or to protect individuals' inalienable rights as little as
possible.

B. Adam Smith, a prominent and influential early economist, advocated a laissez faire policy. He
described a phenomenon of market economies, which he called the "invisible hand." What is the
invisible hand? (6 points)
The invisible hand is a metaphor used to describe the benefits of a society from a free
market economy

3. Price as a Rationing Tool

A. How does the price ration scarce goods in a market economy? (4 points)

Price rations scarce goods in a market economy by controlling the scarce goods or items. It
Helps by showing where resources are required and where they are not. Items that have high
prices are usually more scarce and items with lower prices are usually less scarce.

B. An increase in price provides information about the relative scarcity of a good. What does it
say? (4 points)

An increase in price shows that the goods are becoming more scarce or having a
limiting supply.

C. An increase in price may be caused by either of two things. What are those two things? (4
points)

An increase in price is caused by either availability or value. Or supply and demand