Central banking: an overview

 

A major sector of any modern monetary system is the central banking system, which is important to the functioning of the private economy and the fiscal operations of the national government. Central banking is an activity separate from ordinary commercial banking, because a central bank usually has few transactions with private customers, dealing primarily with commercial bank and with the national government. The roots of the central banking system go back more than two centuries. Nevertheless, central banks as we know them today are relatively recent development. Like electric power and the automobile, central banks are pretty much the products of the twentieth century. For example, at the turn of this century no central bank existed in any country of Western Hemisphere. The central banking system for the United States (Federal Reserve System) was created late in 1913, and the Bank of Canada appeared in 1934.

The characteristics of the Modern Central Bank. It is difficult to give a brief definition of a central bank that is both comprehensive and accurate. The nature of a central bank depends largely on its function, which vary according to time and setting. Essentially, a modern central bank performs at least three functions: managing the nation’s monetary system, serving as a bankers’ bank, and acting as fiscal agent for the national government.

Monetary control. The most important characteristic of the modern central bank is its control over the monetary system for facilitating the achievement of national economic goals. In exerting this control, the central bank regulates the supply, cost, and availability of money and credit. Monetary control is enhanced by the central bank’s monopoly on the banknote issue and its ability to create and destroy monetary reserves by its lending and “investing” activities. Since monetary control is a prerogative of the sovereign government, the central bank is a public service organization that emphasizes the national interest rather than its own profit or welfare.

Bankers bank. Being a bankers’ bank implies that the central bank provides services to the commercial banking system similar to those that the commercial banking system performs for individuals and business firms. Commonplace services that nevertheless promote the smooth operation of the monetary and banking systems include, for example, the clearing and collecting of checks, distributing coin and paper currency to commercial banks, and providing some degree of supervision and regulation over the activities of commercial banks.

Fiscal agency function. In its role as a fiscal agent, the central bank serves as a banker for the national government. Here the central bank receives, holds, transfers, and disburses funds of the central government.

Central and commercial banking functions involve widely differing objectives and methods, and therefore these functions are kept separate. The central bank orients its policy primarily toward the attainment of national economic objectives, whereas the commercial banking system is essentially profit-motivated.

TASKS

I. Answer the following questions:

1. Why is the central banking system a major sector of any monetary system?

2. How long is the history of modern central banking?

3. What are the functions of a central bank?

4. What does the nature of a central bank depend on?

5. What are the main distinctions between central and commercial banking?

II. Are the following statements true or false? Correct the false ones:

1. The object of central banks in the monetary field is to support the Government’s activities in other fields.

2. Every bank issues its own notes.

3. Private individuals and businesses often deal with central banks.

4. Central bank is a bank officially appointed by law to work closely with the Government.

5. Commercial banks perform the duties of issuing and managing the country’s currency.

6. The commercial banking system is profit motivated.

III. Render the text in English:

Федеральная резервная система была создана в 1913 г. на основании закона, принятого Конгрессом. Наиболее важным органом в Fed является совет управляющих, находящийся в Вашингтоне, федеральный округ Колумбия. Совет состоит из семи членов, каждый из которых назначается на 14-летний срок президентом США. Совет возглавляется председателем, назначаемым из состава управляющих на 4-летний срок.

Fed – это банк банков. Коммерческие банки держат свои депозиты в Fed и осуществляют платежи друг другу через перевод средств с этих депозитов. Fed устанавливает резервные требования для всех банков.

Федеральная резервная система состоит из 12 округов, каждый из которых имеет свой резервный банк. Предоставляя совету материалы по анализу экономической ситуации в каждом из округов, банки тем самым держат совет в курсе событий, происходящих в стране.

IV. Fill in the blanks with proper words or word combinations:

board of directors                       maximizing profit

public and private influences      top executive officers

Federal Reserve bank                  stockholders

public welfare

The United States is divided into 12 Federal Reserve Districts, each containing a …. A total of 25 branches serve particular areas within the various districts. Blending …, the corporate organization of the Federal Reserve banks resembles that of commercial banks. Each Reserve bank is headed by a … who select the …. Basic differences as compared with commercial banks include the absence of powers held by … in private corporations and orientation toward enhancing … rather than ….

V. Give a summary of the text.

 

LOANS IN THE UNITED KINGDOM

 

In the process of social production there can be saved up stocks of money, that are kept in the Treasury, or funds, that can be accumulated by large insurance companies, banks, pension funds as well as by private savers. These stocks could be used to make different loans. Sometimes the government lends this money to various programs in education, medicine, culture, construction, to support small business, etc., the interest rate to be paid being very low. We can instance a special program called Loan Guarantee Scheme aiming at supporting small business in the United Kingdom. At 3% interest the government guarantees 70% of the money lent by the bank to a businessman. More often the funds are used to earn extra profit. The interest rate is determined as the equilibrium price in the loan market, that is that part of the capital market which is concerned with the provision of medium-term and long-term loans to governments, commercial houses and industrial companies, or in the money market for very short-term loans.

Thus, a loan is money lent on condition that interest will be paid at an agreed rate and that the amount lent will be repaid at an agreed time or in an agreed manner. There exist many types of loans in UK economy and each of them has its specific features.

Such loans as balloon and bullet are repaid irregularly. The balloon loan is a loan where the repayments are unevenly distributed throughout the life of the loan. The borrowers usually make larger repayments as soon as they have got a possibility to return money; the larger repayments are known as the “balloons”. When the borrower pays only interest during the life of the loan and then repays all the principal as the final repayment, the loan is called a bullet loan.

There exist loans on mortgage of property. You will pay only interest during the period of the flat loan, the amount borrowed being repaid at the end of the period in cash or by arranging another loan. The table loan is repaid by regular monthly installments, and each consists partly of interest and partly of some of the amount borrowed. Thus at the end of the period of the loan all the interest and the whole of the amount borrowed will have been paid off. The name “table” relates to the table issued by building societies stating the amount of the monthly payments at various rates of interest and for various periods of loan. A building society can make the interest-only-loan to a retired person who pays only interest, leaving the principal to be repaid when the owner sells the house or when he dies.

A bank can lend money to a private person (personal loan) for the purpose of personal expenditure, such as payment of household bills or for buying consumption goods such as a motor car, boat, furniture, etc. Such loans are usually repayable by installments in less than two years and are often made without security; the rate is therefore high.

The hard and the soft loan is made by one country to another on condition that the borrower repays it in the lender’s currency (the hard loan) or the borrower’s currency (the soft loan).

There exist loan or state clubs and societies. A loan club is often a private club whose members, usually low-paid workers in a factory or office, pay regular amounts into a fund from which short-term interest-bearing loans are made to members who request them during the year. Fines are charged for late repayment, and interest is paid to members who deposit money with the club. On a certain date each year, usually just before Christmas, the entire fund is shared out among the members.

These are only a few examples of loans made in the United Kingdom.

TASKS

I. Answer the following questions:

1. What stocks of money can be used to make loans?

2. What conditions should be taken into account to make loans?

3. When is the interest rate very high and when is it very low?

4. When do you pay only interest during the life of the loan?

5. What kinds of loans are made on mortgage of property?

6. Do employees earning low wages have any opportunity to borrow money?

7. Is it beneficial for a lender to make personal loans?

II. Match the terms with their definitions:

 

1. Loan	A. the department responsible for the finances, the management of the monetary system, etc.
2. Interest	B. the power of a business to earn profits
3. Mortgage	C. a state of balance when the total demand is satisfied by the total supply
4. Funds	D. a series of regular payments made under agreement in order to settle a debt
5. Installment	E. an amount of money borrowed by an individual or a company
6. Treasury	F. the thing given as a security
7. Equilibrium	G. a charge paid to a person or organization that has lent you money
	H. amounts of money

 

III. Fill in each blank with one word from the box to illustrate typical collocations:

 

condition         repayments     money              rates

interest             security            society business          loan

1. to support	2. to pay
to run______	to sell_____
small	compound
3. to lend	4. to agree on
to borrow_____	to accept______
to deposit	to meet
5. to distribute	6. to arrange
uneven_______	to make________
monthly	personal
7. various
agreed________
interest

 

IV. Render the text in English:

Как известно, деньги, данные взаймы на условиях, что они будут возвращены или частями, или единовременно и в согласованные сроки, являются займом. Обычно заемщик платит кредитору согласованную процентную ставку, за исключением случаев беспроцентного займа. Существует теория ссудных фондов (loanable-funds theory), согласно которой процентные ставки должны подниматься или падать до тех пор, пока объем денег, который заемщики желают получить в кредит, не совпадет точно с объемами фондов, которые кредиторы хотят в этот период предложить взаймы.

V. Give a summary of the text.

MARKET RESEARCH

 

Businesses need information if they are to make good decisions. One way of gaining that information is by carrying out market research. There are various types of market research. Businesses need to decide which market research methods are mostly likely to give them the information they need.

Many businesses are product orientated. This means that they design and make a product, and then try to convince consumers to buy it. An example might be a drug company, like Glaxo, developing a product to help consumers with an illness and then advertising it.

Businesses can also be market orientаted. This is where they try to find out what consumers want before making the final product. In 1993 Pepsi Cola launched Pepsi Max, a sugar free cola drink designed to taste like the original. Before the product was sold, Pepsi tried to find out the type of product consumers wanted. Finding out about what consumers want and need, and what makes them buy, is called market research.

Businesses which are mainly product orientated risk spending a large amount of resources launching a product which proves to be a failure. Researching the market helps reduce this risk. It should focus research and design effort onto products which have a chance of success in the market place. When the product is launched, a carefully researched product stands less chance of failing.

The stages of market research are:

– what is the question which the business wants to find an answer to?

– what information is needed to answer this question?

– what method of market research will be used?

– collect the data;

– analyze the data, draw conclusions and make recommendations.

Market research attempts to find the answers to questions a business might have about its market. For example, in 1991 the marketing department of Pepsi-Cola started with this question: would launching a new product increase total sales of its products? The market researcher must then decide what information might help answer this question. Pepsi-Cola wanted information about the existing pattern of sales in the market and how the market had changed. It hoped to be able to identify a segment of the market which it could sell to. Pepsi also wanted consumers to tell it about the sort of new product they would like to buy. The market researcher then decided how best to collect this information. There are two ways of doing this: desk research and field research. Pepsi-Cola used both. The information is then collected and analyzed. Finally, the business has to make a decision about what to do in the light of the information formed. Pepsi-Cola decided to launch a new product, Pepsi Max.

Desk research involves the use of secondary data. This is information which is already available, both within and outside the business.

Information within the business. Businesses collect information routinely. Invoices, for instance, will tell them how much they sell and who they are selling to. Accounts will give information about the value of sales and costs of production. Pepsi knew, for instance, that sales of ordinary Pepsi were far higher than sales of Diet Pepsi.

Information from outside the business. Businesses can also collect information which is available from sources outside the business. Some of these sources are:

– government – published statistics, such as consumer spending figures; reports such as Monopolies and Mergers Commission Reports;

– the media – reports in newspapers, magazines, on radio and on television;

– trade associations;

– research organizations – reports prepared by specialist market research organizations such as Mintel or Mori; articles published in academic journals.

Pepsi was able to use market research reports about the soft drink market. The results showed that both in the USA and outside North America Diet Pepsi and Regular Pepsi sales were less compared to its main rival, Coca Cola. Pepsi used this information to ask a market research question: how could Pepsi be changed so that sales increased?

Field research involves the collection of primary data – information which no one has yet collected. It is collected specially for the particularly piece of research. Primary data is collected through direct investigation, usually in one of three ways – observation, survey and experiment.

Observation. Looking at and recording what people do and how they behave can be important. For instance, a supermarket may find that sales in one aisle in the store are very poor. By observing people, it would be possible to see whether, for instance, the problem was that people were not going down the aisle at all, or whether there was reasonable traffic down the aisle but customers weren’t buying. However, observation can’t tell the supermarket anything about why shoppers are behaving in this way.

Survey. A survey usually involves asking question of respondents – people or organizations reply to the questions asked. Pepsi surveyed consumers outside the USA about Diet Pepsi. What it found was that Diet Pepsi had two problems. Firstly, drinking Diet Pepsi left many consumers with a slightly bitter after-taste which was caused by the use of artificial sweeteners. Secondly, many consumers, particularly in Latin American countries, had a negative image of diet products. They saw them as effeminate or linked them with people who had problems such as diabetes or being overweight.

There are different ways of conducting surveys. A postal survey, where questionnaires are sent through the post, or a newspaper survey, which readers are invited to fill in and return, are cheap. Telephone surveys, personal interviews and consumers’ panels are more expensive because an interviewer has to be employed to interview customers. However, only a fraction of customers sent a postal survey will respond. A much larger proportion of those approached will take part in telephone and personal interviews. The interviewer can also help the respondents understand what questions mean and how they should be answered.

If the interview is in a person’s home, products, packaging, etc. can also be shown so that reaction can be recorded. A consumer panel, where a group of people meet together, allows researchers to see how people react in a group situation to a product or idea.

Surveys can only be useful for market research purposes if the questions asked are appropriate. For instance, the name of Pepsi’s new product, Max, came from asking consumer panels in a number of countries to choose the best name out of 13 suggested (a closed question because there is a definite answer). Pepsi would have learnt less if they had simply asked the panels to invent a name (an open question because there are so many possible answers). This is because it is unlikely that two panels would have come up with the same name. Pepsi would not then have known which was the most popular.

Sampling. A survey cannot ask every customer for his opinion. Only a fraction or sample of customers can be surveyed. To be useful, the sample chosen must be representative of all consumers (the population).

In a random sample, every potential respondent has an equal chance of being chosen. Random numbers can be used to do this or it can be done by “picking people out of a hat”. A small random sample, however, may not be representative. This means a large sample to be taken, which is costly and takes time. To reduce the length of time, a systematic sample can be used. This is where every 100th or 1000th person on a list like a telephone directory or the electoral register is chosen. In a quota sample, the sample is broken down (or stratified). For instance, Pepsi might know that one out of ten people who bought diet colas were aged 0-14, seven out of ten 15-24 and the rest were over 25 years old. So out of a sample of 100, Pepsi would ask 70 people (7 out of 10) aged 15-24 to complete a survey. One problem with a quota sample is that any people who fit the description can be asked to complete the survey. So Pepsi, wanting to find seventy people aged 15-24 to complete a survey, could ask the first seventy 15-24 year olds who came out of a McDonalds in London. This may not be very representative of all 15-24 year olds. A stratified random sample may get round this problem. It is a quota sample where all the representatives, the people being interviewed, must be chosen at random. For the sample to be random, Pepsi would have to find some way of selecting 70 young people through pure chance.

Experiment. Market researchers can use experimental techniques. To launch a new product is often very costly. Instead, products could be tested on groups of consumers to see whether they are acceptable and likely to sell well. For instance, Pepsi tried out its new formula diet Pepsi Max with consumer panels. They gave a favorable response. If they hadn’t, Pepsi would have gone back and produced another formula. The next stage was to test market Max in two countries, Italy and the UK. These two countries were chosen because British and Italian consumers have different tastes. If the product was a success in both countries, then it was likely that it would be successful throughout the world.

Decisions. The purpose of market research is to help a business come to a decision. Pepsi thought that there was a potentially large market for a new diet coke by looking at market sales figures. It found out what consumers didn’t like about its existing product and designed a new product. Consumer trials showed that the new product was well liked. Finally, Pepsi decided to launch Pepsi Max in some countries.

TASKS

I. Answer the following questions:

1. What is the difference between a market orientated and product orientated business?

2. What is the purpose of market research?

3. What are the stages of market research?

4. What sources of information are available to someone undertaking desk research?

5. What are field research and desk research?

6. A shopping center wants to find out how many shoppers visit the center. How could it gather this information?

7. What differences are there between a postal survey and personal interviews in surveys?

8. A business wants to take a random sample of people in the Perm area. How could it do so?

9. A chocolate manufacturer wants to find out if a new bar of chocolate is going to sell well. How could it find this out without having to go to the expense of launching the product nationally?

II. Match the terms with the definitions:

 

1. Research involving asking questions of people or organizations.	A. desk research
2. Information which already exists, such as accounts and sales records, government statistics, newspaper articles or reports from advertising agencies.	B. field research
3. Small group out of a total population which is elected to take part in a survey.	C. survey
4. Finding out information from secondary data.	D. secondary data
5. The process of collecting primary data.	E. Sample
6. A person who or an organization which answers questions in a survey.	F. market oriented business
7. A business which develops products which have been researched and designed to meet the needs of consumers.	G. questionnaire
8. A list of questions to be answered by respondents, designed to give information about consumers’ tastes.	H. market research
9. Business which develops products with little or no market research and which it hopes will prove successful in the market.	I. respondent
10. The process of gaining information about customers, competitors and market trends through collecting primary and secondary data.	J. product oriented business

 

III. Fill in the gaps with the following words: characteristics, acceptance, market segment, analysis, carry out, techniques, products, surveys, observation, research, panels, questionnaires, desk:

Market research is the systematic and objective classification, collection, _______ and reporting of information about a particular marketing problem. Market research uses a variety of ______ such as in-depth interviews and group _____ which can be used primarily for motivational _____; in addition, field studies can be undertaken using ______ and interviews, and _____ research of records and data, these being used primarily for marketing intelligence. Finally, techniques such as consumer _____, market experiments and _____ may be used to gain information about existing ____. Businesses _____ market research to enable them to identify market tends; to find out about market _____; to forecast market potential; to analyze market share; to find a _____ ______; to test consumer _____ of new and existing products.

IV. Render the text in English:

Практически любой компании требуются детальные и точные знания о своих потенциальных клиентах и характере их потребностей и запросов. Сбор, обработка и объяснение этой информации – изучение рынка – стало настоящей индустрией, где работает множество специализированных фирм, использующих новейшие научные методики и информационные технологии. Для мелких фирм такие агентства слишком дороги, и они проводят свое собственное изучение рынка (когда и где им это необходимо), посылая вопросники клиентам. Более крупные фирмы часто поручают провести изучение рынка специалистам. В этом случае применяются различные методы:

- кабинетное исследование, включающее использование внутренней и внешней информации;

- полевое (экспедиционное) исследование, включающее наблюдение, выборочное исследование, эксперимент, опрос (почтовый опрос, газетный опрос, телефонный опрос, личную беседу, работу групп, изучающих реакцию потребителей на новые изделия).

VI. Give a summary of the text.

MARKETING

 

The process of planning and executing the conception, pricing, promotion, and distribution of ideas, goods and services to create exchanges that satisfy individual and organizational objectives.

or?

A business function (and a function of non-business enterprises) that often includes elements of sales, advertising, product development, research, pricing and other activities… i.e., organizational tasks.

or?

Any activity which supports the primary purpose of any organization – to gain and maintain a satisfactory customer base, or more broadly, to gain and maintain the support of important stakeholder groups.

or?

A force within the organization that encourages socially and ethically responsible behavior in the market place.

or?

A management orientation that suggests the objective of an enterprise is to identify and satisfy customer values better than competitors can or will do. This characterization of marketing implies that all organizations compete for markets (customers) and/or resources and that a major objective is to favorably differentiate your organization from that of your competitors.

There is little universal agreement on the best or right definition of marketing, although academics, particularly economists favor the first one, as a process. Concepts of management and organization evolve and change over time, and have more or less value depending upon a particular organizations circumstances. This is also true of marketing. From simple exchange processes that served the needs of ancient civilizations to the enormously complex processes of today, the foundation of exchange is creating or adding value for the buyer. And what is of value to a buyer is very often far from clear. There are a few rules which can help us identify marketing values, and to compete for customers more effectively.

Values are derived and influenced by what buyers think they know about the economy, technology, competitive offerings, and experience if any, with our firm as a supplier.

Buyers learn from experience and their values change. Think about your first home purchase, airline flight or automobile, and what was important to you then and what is important to you now as a buyer.

The process, functions, activities and forces of marketing provide a business with an enormous (and untapped) array of weapons, tools and techniques that are potential sources of competitor advantage.

In his book Marketing to Win (Harper&Row, 1999), Frank K. Sonnenherg, national director of marketing in Ernst&Young’s management-consulting group, writes about dramatic developments in the world marketplace that predicate deep changes in the way we manage and market our goods and services. “The bottom line”, he challenges, “is if you don’t change now, you may as well start filling your scrap-book with memories of today. It is unlikely you will have much to show for tomorrow”.

Two companies that excel in their marketing stances are Microsoft Corp. and Alcoa. Both of them recognized and mastered a leading-edge marketing mentality years ago, which propelled them into the world-class arena and to the top of their respective industries.

In a truly world-class organization, marketing is a conduit through which superior processes turn out innovative products to a worldwide audience. That channel operates in two directions. Initially, it transports valuable information about market needs and deficiencies into the company, where it is translated into superior products and service. These, in turn, are released into the marketplace.

The key to surviving the politically and geographically fluid markets of tomorrow is to understand that the only universal is change. Companies must be astute enough to realize that there is no one “right way”, and to be agile enough to respond responsibly and effectively to changing dynamics.

What links companies such as Microsoft and Alcoa, jettisoning them into the world-class elite, is their continuing tradition of exploring frontiers. Both are mavericks not content to sit complacently atop their respective kingdoms, but are driven, as overachievers, to push past the boundary of what we know, of what sells now, and of what is safe.

On the face of it, Microsoft and Alcoa appear to have little, if anything, in common. The former is an upstart pioneer and top performer in the young world of high tech. And the latter is as familiar as an old friend in a mature, heavy-manufacturing industry whose byproducts have been a part of American life for as long as most of us can remember.

Yet each is a dynamic industry leader and innovator, wholly responsible for nudging at the boundaries that define their businesses. It is this unique ability to “grow” the marketplace that makes these companies world-class marketing entities worthy of a closer look.

“To get results in the marketplace, your focus must be on positioning your firm and differentiating your services from the competition”.

TASKS

I. Answer the following questions:

1. What basic issues does marketing incorporate?

2. What propelled Microsoft and Alcoa into the world-class arena and to the top of their industries?

3. How does marketing work in a truly world-class organizations?

4. What are the two primary directions marketing operates in?

5. What is the key to surviving the politically and geographically fluid markets of tomorrow?

6. Why do companies such as Microsoft and Alcoa have much in common?

7. How would you define marketing? Why?

8. Why do you think marketing is important to a company’s growth?

9. What is meant by “both are mavericks”?

II. Paraphrase the following statements:

1. Marketing is the process of planning and executing the conception, pricing, promotion, and distribution of ideas, goods and services to create exchanges that satisfy individual and organizational objectives.

2. Marketing is a business function that often includes elements of sales, advertising, product development, research, pricing and other activities.

3. Marketing is any activity which supports the primary purpose of any organization.

4. Marketing is a force within the organization that encourages behavior in the market place.

5. Marketing is a management orientation that suggests the objective of an enterprise.

III. Render the text in English:

Концепции руководства и организации изменяются со временем в зависимости от конкретных обстоятельств. Это также верно и для маркетинга. Развиваясь от простых операций обмена, служащих потребностям древних цивилизаций, до необычайно сложных процессов сегодня, основа обмена состоит в создании или прибавлении для покупателя. А что составляет ценность для покупателя, зачастую остается далеким от ясности. Существует несколько правил, которые помогают нам определять покупателей и бороться за них более эффективно. Ценности определяются знаниями покупателей об экономии, технологии, конкурентных предложениях и опыте использования продукции компании.

IV. Give a summary of the text.

CONSUMER CHOICE

 

Economics is about scarcity, about social situations, which require that choices be made. The theory of consumer behavior deals with the way in which scarcity impinges upon the individual consumer and hence deals with the way in which such an individual makes choices. This consumer may, but need not be, an individual person. Families and households also make collective consumption choices on behalf of their members. The theory takes the consumer unit as given. It therefore presents us with an important instance of how social sciences, such as sociology and social psychology, which deal, in part, with the way in which people organize themselves into household and other units, could complement economics*.

The theory of consumer choice has many applications. It enables us to deal with the selection of consumption patterns at a particular time and the allocation of consumption over time, and hence with saving. The individual supplying labor can be thought of as simultaneously choosing an amount of leisure time, so the same theory is relevant there as it is when we come to consider behavior in the face of risk. Moreover, in constructing a theory to deal with problems such as these, we are forced to think carefully and to define precisely, such much abused terms as “real income” and the “cost of living”, so that our theory gives us many valuable insights into matters of potentially considerable practical importance.

In order to derive the model of choice-making we need to describe first of all the logical structure of the choice problem which faces any consumer. We will find it helpful to think of that structure as being made up of three components. First, we must consider the items which the consumer finds desirable, the object of choice. Secondly, since the desirability of an object does not necessarily imply that it is available to be chosen, we must consider any limitations that might be placed on the alternatives available to the consumer, the constraints upon choice. Finally, because choice necessarily involves the process of selection among alternatives, we must consider the way in which the consumer ranks the alternatives available, the consumer’s tastes or preferences.

The objects of consumer’s choice are goods and services, yielding utility, which may be ordered and (in principal) measured. The consumer’s budget constraint shows how the upper limit on consumption (usually present disposable income) may be allocated among consumption patterns or goods at given prices. The position of the budget line is determined by income and price alone. Its slope reflects only relative prices.

Consumer tastes can be represented by a map of non-intersecting indifference curves. Along each indifference curve, utility is constant. Higher indifference curves are preferred to lower indifference curves. Since the consumer prefers more to less, indifference curves must slope downwards. To preserve a given level of utility, increases in the quantity of one good must be offset by reductions in the quantity of the good.

Indifference curves reflect the principle of a diminishing marginal rate of substitution. Their slope becomes flatter as we move along them to the right. To preserve utility, consumers will sacrifice ever smaller amounts of one good to obtain successive unit increases in the amount of the other good.

Maximizing consumer utility generates an equilibrium where the budget constraint and the highest possible indifference curve are tangential. At any point other that equilibrium, the consumer can substitute one good for another and increase utility. In equilibrium the marginal rate of substitution between goods is equal to their ratio of prices.

Income-consumption and price-consumption curves describe how the quantity demanded of a good alters with variations in income and price.

At constant prices, an increase in income leads to a parallel outward shift in the budget line. If goods are normal the quantity demanded will increase.

A change in the price of one good rotates the budget line around the point at which none of that good is purchased. Such a price change has an income effect and a substitution effect. The income effect of a price increase is to reduce the quantity demanded for all normal goods. The substitution effect, induced by relative price movements alone, leads consumers to substitute away from the good whose relative price has increased.

In a two-good world, a good whose quantity purchased moves together with the changes in the price of the other good is called substitute. That, whose quantity moves in opposite directions to the other good’s price change is a complement.

The Engel curve maps quantity demanded of one good against changes in income. The ratio of the marginal propensity to consume (slope of the Engel curve) to the average propensity to consume (ratio of quantity demanded to income) is known as the income elasticity of demand.

The demand curve relates quantity demanded of one good to its own price. The own price elasticity of demand is given by the slope of the demand curve (treating quantity as the dependent variable) divided by the ratio of quantity demanded to price. The cross elasticity of demand measures the proportional change in the quantity demanded of one good to a proportional price of another.

Transfers in cash and kind. Cash transfers allow consumers to spend the extra income in any way that they desire. Transfers in kind may limit the consumer’s option. Where they do, The increase in consumer utility will be less than under a cash transfer of the same monetary value. Yet transfers in kind are politically popular. The electorate wants to know that money raised in taxation is being wisely spent. Some who favor transfers in kind will argue that the poor really do not know how to spend their money wisely. One view says that people can best choose for themselves, whereas the other says that people may not act in their own best interests. This issue is not merely one of economics but also of philosophy, involving wider questions such as liberty and paternalism. In so far as people are capable of judging their own self-interest, economic analysis is clear: people will be better off, or at least no worse off, if they are given transfers in cash rather than in kind.

TASKS

I. Answer the following questions:

1. What does the theory of consumer goods enable us to do?

2. What are the components of the logical structure of the choice problem?

3. What is the difference between a substitute and a complement?

4. When do we have an income effect and a substitution effect?

5. How a given level of utility can be preserved?

6. How utility can be preserved?

II. Match the terms with their definitions:

 

1. Objects of consumer choice	A. relates quantity demanded of one good to its own price
2. Engel curve	B. generates an equilibrium where the budget constraint and the highest possible indifference curve are tangential
3. Maximizing consumer utility	C. can be represented by a map of non-intersecting indifference curves
4. Consumer tastes	D. maps quantity demanded of one good against changes in income
5. Budget constraint	E. are goods and services, yielding utility which can be ordered and measured
6. Indifference curves	F. shows how the upper limit of consumption may be allocated among consumption patterns or goods at given prices
7. Demand curve	G. reflect the principle of a diminish marginal rate of substitution

 

III. Fill in the gaps:

1. The position of the budget curve is determined by ….

2. Consumer tastes can be represented by a map of ….

3. At constant prices, an increase in income leads to a parallel outward shift in ….

4. Income-consumption and … curves describe how the quantity demanded of a good alters with variations in income and price.

5. …may restrain the choices a consumer can make.

6. In equilibrium … substitution between goods is equal to their ratio of prices.

IV. Render the text in English:

В 19 веке многие экономисты были обескуражены следующей проблемой: почему цена воды, столь необходимой для жизни человека, настолько ниже цены алмазов, имеющих только декоративную функцию? Один простой ответ состоит в том, что алмазы редки, а вода находится в изобилии. Но такой ответ не может быть исчерпывающим, поскольку совокупная полезность, получаемая потребителями от использования воды, выше, чем от использования алмазов. Эта проблема решается в рамках концепции предельной полезности.

Потребители продолжают покупать товар до тех пор, пока отношение его предельной полезности к цене равно этому отношению для других благ. В пределе последний литр воды, который мы выпиваем, дает очень малое приращение полезности, тогда как в пределе последний алмаз, который некто покупает, как правило, делает его очень счастливым.

Чтобы как-то иначе представить суть проблемы, вообразите, что некто, имевший алмаз в один карат, умирает от жажды, и у него появилась возможность купить один литр воды за алмаз. Можете быть уверены, что он с упоением совершил бы эту сделку, потому что в этих условиях предельная полезность воды была бы намного выше предельной полезности алмаза.

 

Part II. Review Tests