Question

Part 2 - Check Your Understanding- Answer the questions.

Answer 1

Answer:

7. What prevents business from charging extremely high prices in the free market system?

If a business charges a very high price in a free market, demand for their products simply falls too much to be profitable. Customers abandon the firm, and opt to buy goods from the firm's competitors.

8. What effect does competition between producers have on the quality and availability of goods  and services?

Competition brings higher quality goods, at lower prices. This is because competition obliges each firm to improve as much as possible, and to provide goods with prices as low as possible, in order to outsell the other firms.

9. Most economists agree that unprofitable business should be allowed to fail. What are the  downsides of the government spending money to help failing businesses?

The first downside is that money from citizens is used to prop up a business that is likely to fail anyway. Another downside is that it prevents markets from weeding out inefficient firms, which should be replaced with better firms under normal circumstances.

10. Identify two major drawbacks commonly associated with capitalism. Why do they exist?

The first drawback is that capitalism generates wealth inequality, and this inequality often leads to social disruption.

A second drawback is that capitalist economic models often do not include enviromental variables, meaning that capitalist economic activity frequently leads to natural resource depletion.

11. Think of a popular movie where a character or business sells a good or service and must  compete with other sellers. Identify the movie, characters, and the result.

A good example is the movie the Founder, starring Michael Keaton. This film tells the story of the McDonald brothers, how the founded McDonalds, and how they developed their successful franchise model.