Chapter 2 – Markets and Society 1
Chapter 2
MARKETS AND SOCIETY
Microeconomics in Context (Goodwin, et al.), 4
th
Edition
Chapter Overview
This chapter points out that the economy may be understood as existing within “three
spheres” of activity; not only businesses (estimated at 64% of the economy), but also the
core sphere, comprising economic activity that occurs within households and
communities (21%), as well as the public purpose sphere, of government and not-for-
profit activity (15%). The chapter then discusses markets, first by defining markets in
different ways and listing the institutional requirements for smoothly-functioning
markets. Markets are further classified according to what is sold and how prices are
determined. The chapter ends with a brief discussion of the advantages and
disadvantages of markets, a topic that will be discussed frequently throughout the book.
Objectives
After reading and reviewing this chapter, you should be able to:
1. Differentiate between the three spheres of economic activity.
2. Understand the three different meanings of “markets.”
3. Describe the institutional requirements for well-functioning markets.
4. Classify markets according to what is sold.
5. Classify markets according to how prices are determined.
6. Understand advantages and disadvantages of markets, as well as market
outcomes
Key Terms
core sphere public purpose sphere
public good business sphere
informal sphere market (first meaning)
market (second meaning) market (third meaning)
laissez-faire economy institutions
private property explicit contract
implicit contract physical infrastructure
money retail markets
wholesale markets intermediate goods market
resale market commodities market
labor market financial market
underground market posted prices
market value auction market
bargaining
Chapter 2 – Markets and Society 2
Active Review Questions
Fill in the blank
1. A local grocery store is an example of an organization that would be classified
into the _________________ sphere.
2. Something that is freely available to everyone, and whose use by one person does
not diminish the ability of others to use it, is known as _______________.
3. About 21% of economic activity in the United States is classified as occurring in
the _______________ sphere.
4. “The real estate market in Los Angeles” is an example of the definition of markets
____________________.
5. Markets for raw materials such as agricultural products and minerals are known as
_____________________.
6. Markets for goods and service purchased from businesses, generally in small
quantities, are known as _________________________.
7. A market in which a good is sold to the highest bidder is known as
________________________.
True or false
8. Economic activity in the core sphere tends to be rewarded with wages and
salaries.
9. Religious organizations would be classified into the public purpose sphere.
10. A public good is one which is available at low cost to everyone, and whose use by
one person does not affect its availability to others.
11. One of the advantages of economic activity in the business sphere is that it tends
to encourage innovation.
12. About 15% of economic activity in the United States occurs in the public purpose
sphere.
13. When we speak of a “laissez-faire economy” we are referring to a market based
on product categories.
14. An implicit contract is an example of a social institution of trust.
Chapter 2 – Markets and Society 3
15. Intermediate goods markets involve the sale of used products between
households.
16. Markets with bargaining involve the interaction of a single buyer with a single
seller.
Short answer
17. What is a public good?
__________________________________________________________________
__________________________________________________________________
18. What are the three definitions of markets?
__________________________________________________________________
__________________________________________________________________
19. What are the four institutional requirements for smoothly functioning markets?
__________________________________________________________________
__________________________________________________________________
20. List five different markets classified according to what is sold.
__________________________________________________________________
__________________________________________________________________
Self Test
1. What are the three spheres of economic activity?
a. The core, business, and government spheres
b. The monetary, core, and government spheres
c. The public, private, and social spheres
d. The core, business, and monetary spheres
e. The core, business, and public purpose spheres
2. What sphere of economic activity is comprised of households, families, and
communities?
a. Public purpose sphere
b. Core sphere
c. Internal sphere
d. Dependency sphere
e. Institutional sphere
Chapter 2 – Markets and Society 4
3. Which one of the following is an example of an organization in the public purpose
sphere?
a. A family
b. A supermarket chain
c. A local grocery store
d. A state environmental protection agency
e. A child selling lemonade
4. Which one of the following is an example of a public good?
a. A clean house
b. A city park
c. A lawnmower shared by several neighbors
d. Cable television
e. A doctor’s services
5. Which one of the following statements is false?
a. Public purpose sphere organizations tend to conduct economic activities at
a larger scale than core sphere organizations.
b. Core sphere organizations can respond to needs as well as wants.
c. The primary place where good social relations are established is in the
business sphere.
d. One critique of public purpose sphere organizations is that they can be
inefficient.
e. Business sphere organizations may pursue motives other than making a
profit.
6. About what percent of economic activity in the United States occurs in the core
sphere?
a. 4%
b. 10%
c. 15%
d. 21%
e. 64%
Chapter 2 – Markets and Society 5
7. About what percent of economic activity in the United States occurs in the
business sphere?
a. 15%
b. 21%
c. 32%
d. 64%
e. 73%
8. Which one of the following is an example of a market based on product
categories?
a. The stock market
b. A grocery store
c. A market-based capitalistic economy
d. A used car dealership
e. An on-line bookseller
9. Which one of the following is an example markets as an economic system?
a. The stock market
b. A grocery store
c. A market-based capitalistic economy
d. A used car dealership
e. An on-line bookseller
10. Laws that define which goods can be owned are considered …
a. social institutions of trust.
b. individualist institutions of property and decision making.
c. infrastructure for the flow of information.
d. unnecessary for market functioning.
e. part of implicit contracts.
11. An implicit contract is an example of …
a. an individualist institution of property and decision making.
b. an economic activity in the core sphere.
c. a social institution of trust.
d. infrastructure for the flow of information.
e. a market as an economic system.
Chapter 2 – Markets and Society 6
12. Which one of the following is not a requirement for something to be considered
money?
a. A durable store of value
b. A unit of account
c. Minimal handling costs
d. Backed by government-held assets
e. Acceptance as a medium of exchange
13. Markets for unfinished goods sold between businesses are referred to as …
a. intermediate goods markets.
b. commodity markets.
c. resale markets.
d. wholesale markets.
e. retail markets.
14. Markets for goods and services sold by businesses to consumers, generally in
small quantities are referred to as …
a. intermediate goods markets.
b. commodity markets.
c. resale markets.
d. wholesale markets.
e. retail markets.
15. The prices of goods sold at a convenience store tend to be determined by …
a. bargaining.
b. posted prices.
c. a Dutch auction.
d. a double auction.
e. social institutions.
16. Illegal drugs are sold primarily in which type of markets?
a. Labor markets
b. Underground markets
c. Commodity markets
d. Intermediate goods markets
e. Wholesale markets
Chapter 2 – Markets and Society 7
17. The sale of crude oil would most likely occur in which type of market?
a. A resale market
b. A retail market
c. A labor market
d. A commodity market
e. An underground market
18. Bargaining involves the interactions of …
a. numerous buyers and sellers.
b. one buyer and one seller.
c. one seller and numerous buyers.
d. one buyer and numerous sellers.
e. buyers and sellers with equal market power.
19. Which one of the following is not a potential drawback of markets?
a. A failure to account for environmental degradation.
b. A loss of certain community values.
c. The tendency to over-provide public goods.
d. An inability to correct for excessive market power.
e. A failure to address economic inequalities.
20. Which one of the following statements is false?
a. Markets involve implicit and explicit contracts.
b. Markets require physical and communications infrastructure.
c. Markets provide feedback between buyers and sellers.
d. Markets encourage sellers to respond to buyer preferences.
e. Markets discourage economic actors from increasing efficiency.
Chapter 2 – Markets and Society 8
Answers to Active Review Questions
1. business
2. a public good
3. core
4. based on product categories
5. commodity markets
6. retail markets
7. an auction market
8. False. Activities in the core sphere tend to be rewarded by the direct outcome of the
activity, such as vegetables grown in a garden.
9. True
10. False. The statement is true except that public goods are freely available to everyone.
11. True
12. True
13. False. We are referring to a market as an economic system.
14. True
15. False. Intermediate goods markets involve the sale of unfinished products between
businesses.
16. True
17. A public good is freely available to anyone and its use by one person does not
diminish its ability to be used by others.
18. Markets as place to buy and sell, markets defined by product categories, markets as
economic systems.
19. Individualist institutions of property and decision making, social institutions of trust,
infrastructure for the flow of goods and information, and money as a medium of
exchange.
20. Retail markets, wholesale markets, intermediate goods markets, resale markets,
commodities markets, labor market, financial markets, underground markets.
Answers to Self Test Questions
1. e
11. c
2. b
12. d
3. d
13. a
4. b
14. e
5. c
15. b
6. d
16. b
7. d
17. d
8. a
18. b
9. c
19. c
10. b
20. e