GOVT 350 Test Questions and Correct
Answers 2026 Updated.
What represents the dynamics of the free market system? - Answer Competition resulting in
production (the fruit of labor), and voluntary exchange
Be able to discuss two consequences of competition - Answer Raises quality of products and
overcomes scarcity
What is the relationship between competition and scarcity? - Answer Competition is a
consequence of economic scarcity. Competition exists when people want something which is
not readily available. Increases occur on the demand side when the supply is low or a relative
scarcity exists. More producers are now drawn into the market to meet the demand. Scarcity is
overcome when supply meets demand
What is profit and how does it relate to the market system? - Answer Profit is the incentive
for investment, and rewards result in greater incentives to produce. Object of the market
system is increased production, and competition promotes productivity
What is a 'third party effect' relative to the market system? - Answer Third party effects:
people not party to your exchange and involuntary exchanges
There is a "market failure" because of "external" and "neighborhood" effects for which it is not
feasible to compensate or charge the people affected
What is the general role of prices in a free market system? - Answer Price system, also called
price mechanism, operates as a signaling system to producers and consumers to distribute and
exchange scarce resources for the most efficient uses. They are information signals transmitted
through voluntary market interactions which communicate to suppliers to either increase
production to meet consumer demand or to decrease production given excess supply. Prices
will adjust to discharge or dispose of the surplus or to signal need for greater production
output. Prices then interact with supply and demand and assist in overcoming scarcity and
promoting the most efficient use of scarce resources
How does voluntary exchange facilitate cooperation in the market? - Answer If an exchange
between two parties is voluntary it will not take place unless both believe they will benefit from
it--goes against the notion that one party can gain only at the expense of another
How does the price system overcome scarcity? - Answer Free market economy allocates
scarce resources which have alternative uses or whose uses can be utilized to meet competing
demands without a central command organ. Price system accomplishes all of this by
determining just how each resource (how much of it too) is utilized and where it's distributed.
There is no fixed supply of any given resource. Prices reflect the reality of scarcity and therefore
Answers 2026 Updated.
What represents the dynamics of the free market system? - Answer Competition resulting in
production (the fruit of labor), and voluntary exchange
Be able to discuss two consequences of competition - Answer Raises quality of products and
overcomes scarcity
What is the relationship between competition and scarcity? - Answer Competition is a
consequence of economic scarcity. Competition exists when people want something which is
not readily available. Increases occur on the demand side when the supply is low or a relative
scarcity exists. More producers are now drawn into the market to meet the demand. Scarcity is
overcome when supply meets demand
What is profit and how does it relate to the market system? - Answer Profit is the incentive
for investment, and rewards result in greater incentives to produce. Object of the market
system is increased production, and competition promotes productivity
What is a 'third party effect' relative to the market system? - Answer Third party effects:
people not party to your exchange and involuntary exchanges
There is a "market failure" because of "external" and "neighborhood" effects for which it is not
feasible to compensate or charge the people affected
What is the general role of prices in a free market system? - Answer Price system, also called
price mechanism, operates as a signaling system to producers and consumers to distribute and
exchange scarce resources for the most efficient uses. They are information signals transmitted
through voluntary market interactions which communicate to suppliers to either increase
production to meet consumer demand or to decrease production given excess supply. Prices
will adjust to discharge or dispose of the surplus or to signal need for greater production
output. Prices then interact with supply and demand and assist in overcoming scarcity and
promoting the most efficient use of scarce resources
How does voluntary exchange facilitate cooperation in the market? - Answer If an exchange
between two parties is voluntary it will not take place unless both believe they will benefit from
it--goes against the notion that one party can gain only at the expense of another
How does the price system overcome scarcity? - Answer Free market economy allocates
scarce resources which have alternative uses or whose uses can be utilized to meet competing
demands without a central command organ. Price system accomplishes all of this by
determining just how each resource (how much of it too) is utilized and where it's distributed.
There is no fixed supply of any given resource. Prices reflect the reality of scarcity and therefore
