characteristic of the market system is: A.)Extensive use of direct methods of production B.)Low interest rates C.)Extensive use of capital goods D.)Extensive use of barter 2.)Firms will tend to leave an industry when: a.)Profits in the industry are high b.)The price of industry’s product is rising c.)Demand for the industry’s product is decreasing d.)Costs of production in the industry are decreasing
The Correct Answer and Explanation is:
Correct Answers:
- C.) Extensive use of capital goods
- C.) Demand for the industry’s product is decreasing
Explanation
1. Extensive use of capital goods in the market system
A defining characteristic of a market system (also known as capitalism or a free-market economy) is its extensive use of capital goods. In this system, private individuals and businesses own resources and operate for profit. One major feature is the use of advanced tools, machinery, and equipment (capital goods) to produce goods and services more efficiently. Unlike direct methods of production (A) or barter (D), which are more characteristic of traditional or primitive economies, market economies invest heavily in capital to increase productivity, lower costs, and generate greater outputs. Option B (low interest rates) can vary depending on monetary policy and is not a fundamental trait of the system itself. Capital goods improve efficiency, encourage innovation, and lead to economic growth, all of which are central to the operation of a market system.
2. Firms leave an industry when demand for the product is decreasing
Firms typically operate in industries where they can earn profits. If demand for an industry’s product begins to fall (Option C), firms will experience declining revenues, which often leads to losses or reduced profit margins. This negative trend forces companies to either adapt, downsize, or exit the industry entirely. In contrast, high profits (Option A) and rising prices (Option B) typically attract more firms into an industry. Decreasing costs of production (Option D) make operations more profitable and are more likely to encourage firms to stay. Therefore, declining demand is a primary reason firms will exit—it signals that the market is shrinking, making it unsustainable for all firms to continue operations profitably.
In summary, capital investment drives market systems, and market demand determines industry participation.
