Introduction: What is Economics?

Contents: I Semester

(D.Begg, S.Fisher, R.Dornbusch. Economics.)

Part I. Economics and the Economy. 2

Introduction: What is Economics?. 2

I-1. The Basic Economic Problems. 4

I-2. Two Economic Issues. 8

I-3. Types of Economic Systems. 13

I-4. Positive and Normative Economics. 20

I-5. Microeconomics and macroeconomics. 23

Part II. Demand, Supply and the Market. 28

II-1. The Role of the Market. 28

II-2. The Market. 31

II-3. Supply, Demand and the Market Price. 35

Part III. Types of Markets. 43

III-1. Perfect Competition: Many Buyers and Sellers. 43

III-2. Monopolistic Competition: Many Unique Products. 43

III-3. Oligopoly: A Few Sellers. 44

III-4. Monopoly: One Seller. 44

Part IV. Government in the Mixed Economy. 50

IV-1. What do Governments Do?. 50

IV–2. The Role of Government. 55

IV-3. What Should Governments Do?. 57

IV-4. How Do Governments Decide?. 63

Part V. Taxes. 67

Case 1. Contracting for Prisons in Texas. 71

Case 2. Nationland. 74

Part I. Economics and the Economy

Exercise 1. Listening (Guide to Economics, unit 8 “Factors of Production” – track 23)

“Entrepreneurship is the fourth factor of production”. Which things from the list below do you think entrepreneurs bring to the economy?

• Managing people
• Motivating people
• Finding solutions to problems
• Communicating with customers
• Inventing new products
• Finding new markets
• Making profits
• Organising things
• Taking risks

Listen and check your predictions

 

 

Exercise 2. Listening (Guide to Economics, unit 5 “Opportunity cost” – track 15)

Exercise 1.4 (study Guide, unit 1). Use the words - economic, economical, economist, economics, economy, economize - to complete the sentences below. Use each word once only.

1. The subject matter of ______________________________ is that part of human behavior which relates to the production, exchange and use of goods and services.

2. The heart of Adam Smith’s philosophy was his belief that the __________________________ would work best if left to function on its own without government regulation.

3. Since there is not enough of everything to go around, everyone needs to make choices from among things they want. In the process they will try to ___________________________.

4. David Ricardo is one of history’s most influential _______________________________.

5. In many cases ___________________________ issues can not be solved with theories and models alone. Solution to these problems involves opinion, politics and personal value judgements.

6. It is usually more ___________________ to buy large quantities of a product than small quantities.

· Video (TTC Economics 01) “How Economists Think”

· Exercise on Listening (Basic Economics). “What is economics?” Chapter 01

I-1. The Basic Economic Problems

The central problem of economics is to determine the most efficient ways to allocate the factors of production and solve the problem of scarcity created by society’s unlimited wants and limited resources. In doing so, every society must provide answers to the following three questions:

What goods and services are to be produced and in what quantities are they to be produced?

How are those goods and services to be produced?

Who will receive and consume (get to use) those goods and services?

How Are Those Goods and Services to be Produced?

There is more than one way to build a home or a school, manufacture an automobile, or farm a piece of land. Will the school consist of many stories or one floor? Will the automobile assembly line use robots? How much farmland will be used for corn and how much for wheat?

With the exception of the school building, which in most instances would be a government project, all these questions would be answered in this country by private individuals. In other parts of the world, however, how to manufacture an automobile might well be a decision made by the government. As for farming practices, some societies leave that to government to decide, others follow long-honored traditions, while in still others the farmer decides.

ECONOMIC

экономические ресурсы; экономическая деятельность; экономическая проблема; экономический цикл; экономическая инициатива; экономическая система; экономические переменные; экономические данные; экономическая эффективность; экономическая теория; экономическая стабильность; экономический выбор; экономический рост; экономическое регулирование; экономика услуг; экономическая политика; политическая экономия; народное хозяйство; экономика управления; денежное хозяйство

PRODUCTION

процесс производства; средства производства; производство и потребление; повысить производительность; расширить производство; издержки производства; производство на душу населения; общий объем произведенной продукции; товарное производство

REGULATION

государственное регулирование; правила безопасности; частное регулирование; таможенные инструкции; финансовый регламент; регулирование рынка

GOVERNMENT

государственная политика; государственное вмешательство; государственные доходы; государственные пенсионные программы; государственный долг; государственные закупки

I-2. Two Economic Issues

Trying to understand what economics is about by studying definitions is like trying to learn to swim by reading an instruction manual. Formal analysis makes sense only once you have some practical experience. In this section we discuss two economic issues to show how society allocates scarce resources between competing uses. In each case we see the importance of the questions what, how, and for whom to produce.

The Oil Price Shocks

Oil is an important commodity in modern economies. Oil and its derivatives provide fuel for heating, transport, and machinery, and are basic inputs for the manufacture of industrial petrochemicals and many household products ranging from plastic utensils to polyester clothing. From the beginning of this century until 1973 the use of oil increased steadily. Over much of this period the price of oil fell in comparison with the prices of other products. Economic activity was organized on the assumption of cheap and abundant oil.

In 1973-74 there was an abrupt change. The main oil-producing nations, mostly located in the Middle East but including also Venezuela and Nigeria, belong to OPEC - the Organization of Petroleum Exporting Countries. Recognizing that together they produced most of the world's oil, OPEC decided in 1973 to raise the price for which their oil was sold. Although higher prices encourage consumers of oil to try to economize on its use, OPEC correctly forecast that cutbacks in the quantity demanded would be small since most other nations were very dependent on oil and had few commodities available as potential substitutes for oil. Thus OPEC correctly anticipated that a substantial price increase would lead to only a small reduction in sales. It would be very profitable for OPEC members.

Oil prices are traditionally quoted in US dollars per barrel. Figure 1-1 shows the price of oil from 1970 to 1986. Between 1973 and 1974 the price of oil tripled, from $2.90 to $9 per barrel. After a more gradual rise between 1974 and 1978, there was another sharp increase between 1978 and 1980, from $12 to $30 per barrel. The dramatic price increases of 1973-74 and 1978-80 have become known as the OPEC oil price shocks, not only because they took the rest of the world by surprise but also because of the upheaval they inflicted on the world economy which had previously been organized on the assumption of cheap oil prices.

FIGURE 1-1. The Price of Oil. 1970-86. (Source: IMF, International Financial Statistics. )

1970 71 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86

Much of this book teaches you that people respond to prices. When the price of some commodity increases, consumers will try to use less of it but producers will want to sell more of it. These responses, guided by prices, are part of the process by which most Western societies determine what, how, and for whom to produce.

Consider first how the economy produces goods and services. When, as in the 1970s, the price of oil increases sixfold, every firm will try to reduce its use of oil based products. Chemical firms will develop artificial substitutes for petroleum inputs to their production processes; airlines will look for more fuel-efficient aircraft; electricity will be produced from more coal-fired generators. In general, higher oil prices make the economy produce in a way that uses less oil.

How does the oil price increase affect what is being produced? Firms and households reduce their use of oil-intensive products which are now more expensive. Households switch to gas fired central heating and buy smaller cars. Commuters form car pools or move closer to the city. High prices not only choke off the demand for oil related commodities; they also encourage consumers to purchase substitute commodities. Higher demand for these commodities bids up their price and encourages their production. Designers produce smaller cars, architects contemplate solar energy, and research laboratories develop alternatives to petroleum in chemical production. Throughout the economy, what is being produced reflects a shift away from expensive oil using products towards less oil-intensive substitutes.

The for whom question in this example has a clear answer. OPEC revenues from oil sales increased from $35 billion in 1973 to nearly $300 billion in 1980. Much of their increased revenue was spent on goods produced in the industrialized Western nations. In contrast, oil-importing nations had to give up more of their own production in exchange for the oil imports that they required. In terms of goods as a whole, the rise in oil prices raised the buying power of OPEC and reduced the buying power of oil-importing countries such as Germany and Japan. The world economy was producing more for OPEC and less for Germany and Japan.

Although this is the most important single answer to the 'for whom' question, the economy is an intricate, interconnected system and a disturbance anywhere ripples throughout the entire economy. In answering the 'what' and ‘how' questions, we have seen that some activities expanded and others contracted following the oil price shocks. Expanding industries may have to pay higher wages to attract the extra labor that they require. For example, in the British economy coal miners were able to use the renewed demand for coal to secure large wage increases. The opposite effects may be expected if the 1986 oil price slump persists.

The OPEC oil price shocks example illustrates how society allocates scarce resources between competing uses. A scarce resource is one for which the demand at a zero price would exceed the available supply. We can think of oil as having become more scarce in economic terms when its price rose.

Exercise 4. Translate.

1. Решение вопроса о распределении ограниченных ресурсов в экономике (общества) зависит от того, что именно, каким способом и для кого данное общество намерено производить.

2. Цены на нефть стабильно растут и отсюда, естественно, следует, что потребители нефти пытаются более экономно ее использовать.

3. Невероятный скачок цен на нефть в 70-х годах привел к резкому изменению экономической среды в целом. Однако результатом этого было лишь несущественное снижение объема продаж.

4. Резкое снижение спроса на нефть способствовало росту производства заменителей нефти.

5. Расширяющиеся отрасли производства для привлечения дополнительной рабочей силы вынуждены повышать уровень заработной платы. Возросшие доходы поднимают покупательную способность общества.

Exercise 5. Discuss.

1. If a society was richly endowed with natural resources, would it not face the economic problem?

2. What would be the benefits and costs to the world economy of a substantial fall in the price of oil?

3. Must goods be at least temporarily unattainable to be scarce?

4. Would it ever be desirable to have total equality in an economy?

Exercise 6. Reading an article.

OPEC’s symbolic move

Jun 16th 2005
From The Economist Global Agenda

FOR years now, pessimists have been proclaiming that oil prices were about to bring a dread reckoning on a world thirsting for energy. These days, there must be more than a few red faces at the Legion of Doom. Their predictions of devastating economic effects from high oil prices came to naught as the black stuff soared past $30, then $40, then $50 a barrel, and the world economy posted the best growth rates in a generation. Even more embarrassingly, the gluttonous United States has outperformed its oil-sipping peers.

Nonetheless, even members of the Organisation of the Petroleum Exporting Countries (OPEC), whose oil wells might as well be pumping out hundred dollar bills, are looking for ways to calm prices. They fear that a sustained period of expensive oil, such as the one in the 1970s, during the cartel’s formative years, will bring about a global economic downturn that slashes demand for their product—or worse, spur consuming nations to make their economies more oil-efficient. In the latest OPEC meeting, held on Wednesday June 15th, fretful members like Nigeria overcame the resistance of hawks like Venezuela to secure an increase in official production levels. Members agreed to an immediate quota increase of 500,000 barrels per day (bpd), to 28m bpd, and said they would consider a further 500,000 bpd increase later in the year if prices stay too high.

Unfortunately for oil consumers, this is more of a symbolic effort than a real attempt to ease oil prices. Thanks to cheating by members on their quotas, OPEC is already pumping at least 28m bpd, and possibly as much as 30m. The quota increase merely legitimises activity that is already taking place. Worse, OPEC may not be twiddling its thumbs because it wants, despite the rhetoric, to keep prices high, but because its members lack the capacity to increase production.

OPEC members, particularly Saudi Arabia, the cartel’s swing producer, have historically maintained a buffer of spare production capacity which could be brought online if prices surged. In recent years, however, that buffer has been run down, in part due to soaring demand and in part thanks to the bitter memory of $10-a-barrel oil, which has made oil producers leery of ramping up production capacity too quickly.

Non-OPEC sources of oil are even tighter. Russia, which has been growing its production rapidly in recent years, has seen output stagnate over the past few months. Its oil-transport infrastructure may be close to capacity, and government interference in the energy sector has had the effect of lowering output. Elsewhere, the big oilfields that were developed in the wake of the 1970s oil crises have begun to decline, and oil companies are having to look to undeveloped regions where big investments in technology are needed to get the oil out of the ground, and political and legal risks are often high. For these reasons, global spare capacity has dropped close to a 20-year low.

But this does not mean, as some alarmists are arguing, that world oil production is nearing its peak. There is room for OPEC’s members to increase the amount they pump; it is the memory of $10 oil, not physical limits, that is holding them back. And constantly improving technology is not only raising yields in oilfields everywhere, but also opening up new sources of oil. Companies are going after the stuff under deep water, or locked in unconventional sources, such as oil shale or Canada’s tar sands.

Refining their thinking

However, the fact that there are additional sources of oil to be exploited does not necessarily mean that oil will be cheap. Already, many — including OPEC — are warning that tight refining capacity is an even bigger problem than oil production. Any extra oil that OPEC produces right now will be heavy, high-sulphur crude, which requires high-tech refineries to make the end products meet western environmental standards. But that sort of refinery capacity is already stretched. OPEC ministers have essentially admitted that the current round of quota increases will have no effect on price, saying that until there is more refinery capacity, there is little they can do. The market seems to agree. The price of West Texas crude rose sharply in New York on Wednesday, topping $56 at one point, thanks in part to news that oil inventories had declined by more than expected as America heads into the summer driving season.

There is fierce resistance to building new refineries in rich-world, oil-consuming nations. Moreover, in America subtle differences between the states’ oil-composition standards mean that refiners are forced to make large numbers of small production runs. This not only limits their efficiency but also sometimes causes price spikes as consumers are left stranded, unable to buy “foreign” petrol that does not meet their local standards. Technological advances have so far enabled refiners to eke out more production from existing facilities. But the potential bottlenecks leave consumers vulnerable to price swings.

So far, however, consumers don’t seem to care. High oil prices have had little noticeable impact on world demand—even for oil itself—leaving analysts scrambling for an explanation. Some look to governments, which in the 1970s took vigorous action to improve the energy efficiency of their economies by enacting things like gas taxes and fuel-efficiency standards. There has been little such activity this time around.

Others think that price increases up to a certain point may have little effect, but that even moderate increases after that point (whatever it is) might produce sharp changes in consumers’ behaviour. And still others argue that consumer reaction has been muted because the latest round of price increases, unlike past rounds, has been driven by increasing demand, rather than a sudden contraction in supply. The economic growth driving the higher demand, they argue, may be offsetting the negative effects of high oil prices. Or it may simply be that demand-driven increases are more gradual than those following a supply shock, giving consumers, and economies, time to adjust gracefully.

But now that the world economy is bumping up against short-term supply limitations, that may change. Saudi Arabia seems to be in the process of rebuilding OPEC’s buffer, but this will take time. In the meantime, even if prices fall, they are likely to remain volatile, as even small shocks to supply (a few exploded refineries in Iraq, say) will be able to produce a sudden sharp mismatch between supply and demand. Until the world develops some spare capacity, the road ahead looks sure to be bumpy—particularly if you are driving an SUV.

Exercise 7. Case study.

Collect additional information concerning the world demand for and supply for oil. Exchange your findings with the group and discuss the current oil market situation.

Write a short essay describing the current trends in oil prices:

- What political or economic factors stand behind the high/low price.

- How the current price affects the world distribution of income.

- How it impacts the Russian economy.

The Traditional Economy.

As the name implies, the answers to the What, How and Who questions are decided by tradition in these economies.

Traditional economic systems are usually found in the more remote areas of the world. Such systems may characterize isolated tribes or groups, or even entire countries. They are less common today than they were in earlier decades. Typically, in a traditional economy, most of the people live in rural areas and engage in agriculture or other basic activities such as fishing or hunting. The goods and services produced in such a system tend to be those that have been produced for many years or even generations. They are produced as they always have been. In short, the questions of what the traditional society produces and how it is produced are determined by very slowly changing traditions.

Who gets to keep what is produced in such an economy? Since there is little produced, there is little to go around. Most individuals live near a subsistence level: They have enough to sustain them but little more than that. In some years, when the harvest is poor, some will not be able to subsist and will either leave the society or die. In better years, when the yield is high, there may be more than enough to allow subsistence. When such a surplus exists, it will be distributed traditionally. For example, the bulk of the produce might go to a tribal chief or large landholder, while the balance is distributed according to custom.

The Command Economy.

Countries such as the Soviet Union, Albania, and China are examples of command economies. Groups of high-level technicians, made up of engineers, economists, computer experts and industry specialists known as "planners," advise political leaders who develop and implement a plan for the entire economy.

Essentially, it is the planners who decide what goods and services will be produced. If they want ship production expanded and mining operations cut back, they issue the orders to do so. If more food is needed, the planners might direct tractor production to be increased or fertilizers to be imported from the West. Those same plans might also encourage labor to remain on the farms and direct that transportation and storage facilities be made available to move and hold farm products.

How are goods produced in a command economy? The planners decide which products will be made. They decide where to locate a new truck assembly plant and whether the factory will use more labor or more modern machinery.

It is the planners, too, with guidance from the country's political leadership, who decide who will receive the goods and services produced. By setting wage rates for everyone, as well as interest rates, profits and rents, the planners directly answer the question: Who will receive the goods and services produced?

The Market Economy.

When the fastest-rising young rock group, the And-So-Forths, appeared recently in a televised concert, they wore old-fashioned saddle shoes. That week shoe stores around the country reported receiving calls for saddle shoes "like the And-So-Forths wear." Although some of the storekeepers thought the first customers to ask for the strange shoe style were joking, they soon got the message. Before long, saddle shoes could be seen in most of the nation's shoe stores.

The events described in the paragraph above probably would not have taken place in a traditional or a command economy. Changes in clothing styles in a traditional society could occur only over a period of many years. Those who make the decisions in a command economy might give in to public pressure and produce saddle shoes, but it is their decision to make. In a market economy, or free enterprise system as it is sometimes called, it is likely that if consumers really want saddle shoes, they will get them.

A market, or free enterprise, economy is one in which the decisions of many individual buyers and sellers interact to determine the answers to the questions of What, How and Who.

In addition to buyers and sellers, there are several other essential elements in a market economy. One of these is private property. By "private property" we mean the right of individuals and business firms to own the means of production. Although markets exist in traditional and command economies, the major means of production (firms, factories, farms, mines, etc.) are usually publicly owned. That is, they are owned by groups of people or by the government. In a market economy the means of production are owned by private individuals. Private ownership gives people the incentive to use their property to produce things that will sell and earn them a profit.

This desire to earn profits is a second ingredient in a market economy. Often referred to as the profit motive, it provides the fuel that drives sellers to produce the things that buyers want, and at a price they are willing to pay.

The profit motive also gives sellers the incentive to produce at the lowest possible cost. Why? Because lower costs enable them to (1) increase their profit margins, the difference between cost and selling price, or (2) reduce prices to undersell the competition, or (3) both.

Economists often compare markets to polling booths. However, unlike the booths in which people vote for politicians, markets provide a kind of economic polling booth for buyers to cast their votes (in the form of purchases) for the goods and services they want. Producers who interpret the votes correctly by producing the things that buyers demand can earn profits. Those who interpret the voting incorrectly, producing too much or too little, or charging a price that is too high or too low, do not earn profits. In fact, they often lose money.

As hundreds of thousands of followers of the And-So-Forths descended upon their local shoe stores in search of saddle shoes, the store managers did their best to find the hot new item. They did this because they knew that the sales of these shoes would add to their profits. Manufacturers soon learned about the calls for the new shoe style from their wholesale customers and did their best to satisfy the requests because they too were interested in profits.

Mixed Economies.

What most distinguishes command economies from market economies is the role of government and the ownership of the means of production. We have seen that in command economies factories, farms, stores, and other productive resources are government owned. We have also noted that the economic questions of What, How, and Who are answered by government planners. In contrast, market economies look to the decisions of individual buyers and sellers to answer the same questions, and the means of production are privately owned. Government plays a relatively minor part in this model.

There are, however, no "pure" market economies in the world today. While we can say that markets account for most economic decisions in this country, government has been playing an ever-widening and important role. For example, 50 years ago, government purchased 15 percent of all American goods and services. It now purchases 20 percent.

This blend of market forces and government participation has led economists to describe our economic system and those of most other democratic countries as mixed economies.

Recent changes in the economies of the Soviet Union, China, and certain other communist countries, have served to bring elements of the market into those command economies. As the number of privately owned businesses has increased, economists have begun to refer to those nations as having “mixed economies.”

Exercise 1. Translate from English into Russian and back:

1. The free market allows individuals to pursue their self-interest without any government restrictions.
2. The command economy allows little scope for individual economic freedom since most decisions are taken centrally by the government.
3. In a mixed economy the government and private sector interact in solving economic problems. The government controls a significant share of output through taxation, transfer payments and the provision of goods and services such as defence and the police force. It also regulates the extent to which individuals may pursue their own self-interest.

Exercise 2. Discuss.

1. Most economists would prefer to categorize the U.S. economy as a mixed economy. Why don’t they call it a market economy?

2. Suppose in your previous life you were an economic advisor to Nikita Khrushchev of the Soviet Union. How did you, as a central planner, decide what, how and for whom to produce goods and services in a country of roughly 123 million people at the time?

3. What is the meaning of “free” in free market?

4. Proponents of free market systems argue that free enterprise leads to more efficient production and better response to changing consumer preferences. But others point to the fact that markets are not perfect. Why aren’t markets perfect?

Exercise 3. Write a short essay on one of the following topics:

1. The strength of the marketplace and motivations for government involvement.

2. Russia – from plan to market.

Exercise 4. Understanding a lecture: Yates, Unit 3.

1. You are now going to hear part of a lecture, divided into short sections to help you understand it. As you listen, answer the questions below.

Section 1

Complete the following statement with the words the lecturer uses:

· Markets are _________________through which prices influence how we ____________________.

· Note down how many kinds of economy the lecturer is going to talk about.

Section 2

· Note down the first kind of economy.

________________________________________________________________________________

· Is this statement correct or incorrect?

In this kind of economy the government decides what should be produced and what should be consumed.

Section 3

· Is this statement correct or incorrect?

To plan this kind of economy is very simple.

· Note down the country that is an example of this kind of economy.

________________________________________________________________________________

· Is this statement correct or incorrect?

In this kind of economy the government does not own factories or land.

Section 4

· Note down the kind of economy the lecturer is talking about.

________________________________________________________________________________

· Is this statement correct or incorrect? “You cannot become a millionaire in this kind of economy.”

· Note down the country that is an example of this kind of economy.

________________________________________________________________________________

Section 5

· Note down the kind of economy the lecturer is talking about.

________________________________________________________________________________

· Which two sections of society interact in this kind of economy?

________________________________________________________________________________

· Is this statement correct or incorrect? “Most countries have economies of this kind.”

 

 

2. Make sure you know the English equivalents to the collocations below:

- командная экономика

- планирующий орган

- центральное планирование и руководство

- свободный рынок

- вмешиваться

- преследовать собственные интересы

- превышать благосостояние

- создавать новые рабочие места

- государственное вмешательство

- смешанная экономика

- государственные ограничения

 

3. You should also write a summary of the lecture, based on your notes.

 

Exercise 5. Listening (from Guide to Economics, unit 3 C, F and unit 4 C, F) –

Describe their way of life.

Track 09 – Market economy

Adam Smith’s invisible hand theory:

1. People are naturally selfish / helpful.

2. The free market only demands what is good for society/ producers.

3. When people work for their own good, they do good for consumers/ society also.

In the real economy

4. In the free market there is demand for goods which are not expensive/ necessary.

5. There is also demand for goods which …………………

6. The market/Advertising can create demands that do not normally exist.

Here is a list of arguments against state-run hospitals and arguments against private hospitals. After your first listening, try to fill in the table yourself. After the second listening, check your answers with the help of the statements given, which have to be properly classified.

Against state-run hospitals	Against private hospitals

1. Long waiting lists for patients

2. Only the rich can afford health care

3. Staff are poorly paid

4. Taxpayers support everyone

5. Badly organized

6. Creates a class of poor, unhealthy people

7. Hospitals in bad condition

8. Hospitals will reduce costs to make money

9. Is bad for society in general

An invisible hand

Adjustment in prices

Command

A central planning office

Markets

Mixed

Government

Free market

Private sector

Self-interest

 

Industrial Western countries rely extensively on ___/1/ to allocate resources. It is the process by which production and consumption decisions are coordinated through ___/2/.

In a ___/3/ economy, government makes all decisions about production and consumption. Typically, ___/4/ draws up a plan, which is then put into effect by regional and local government agencies.

A ___/5/ economy has no government intervention. Resources are allocated entirely through markets in which individuals pursue their ___/6/. Adam Smith argued that ___/7/ would nevertheless allocate resources efficiently.

Between these two extremes lies ___/8/ economy. Both ___/9/ and ___/10/ play important roles in answering the “what”, “how”, and “for whom” questions for society as a whole.

Analysis

сравнительный анализ; анализ затрат и эффективности; факторный анализ; макроэкономический анализ; метод предельных показателей; анализ сезонных изменений; анализ краткосрочных изменений; экспертный анализ рыночных тенденций; анализируемая проблема; анализ издержек

Equilibrium

равновесие рынка; точка равновесия; равновесная цена; конкурентное равновесие; равновесный уровень цен; подвижное равновесие; равновесие в мировой торговле; равновесное количество; находиться в равновесии; достичь равновесия; восстановить рыночное равновесие

Behaviour

поведение покупателя; динамика цен; состояние рынка; поведение/реакция/ деловых кругов; динамика производства

Household

предметы домашнего обихода; расходы домашних хозяйств; потребительские товары длительного пользования; продукция домашних хозяйств; сектор домашних хозяйств

Aggregate

общая сумма; общий подход; совокупный спрос; общий объем продукции; совокупный продукт; совокупный уровень цен; укрупненный базисный показатель; денежная масса; совокупные расходы на потребление; сводить в единое целое поведение деловых кругов

Total

совокупные издержки; совокупный продукт; общий доход; общие издержки; валовый выпуск; суммарные прибыли; общая выручка; общий экспорт/импорт; подводить итог/подсчитывать

 

Market

рыночные структуры; рыночные цены; фондовая биржа; рынок труда; рыночная стоимость; рыночная экономика; товарный рынок; рыночные силы; исследования рынка; доля рынка; розничный рынок; оптовый рынок; нарушения рынка; Общий рынок; манипулировать рынком; быть/поступить/пустить в продажу; спекулировать на бирже; пользоваться спросом; продаваться по высокой цене; рыночные блага; монополизировать рынок; внутренний рынок.

Соnsumption

потребительские расходы; потребительский набор; потребительский спрос; функция потребления; предметы потребления; суммарное потребление; внутреннее потребление; потребление на душу населения; потребительская корзина.

Wealth

экономическое богатство; финансовое богатство; распределение богатства; “Богатство народов”; природные богатства; духовное богатство; национальное богатство; материальные блага; вещественное богатство; эффект богатства; накоплять богатство; богатые.

Exercise 3.7 (Study Guide, unit 3). Interpret or extend the following statements:

1. Markets bring together buyers and sellers of goods and services.

2. Prices of goods and of resources adjust to ensure that scarce resources are used to produce those goods and services that society demands.

3. Prices are guiding your decision to buy the good, the owner’s decision to sell the good, and the students decision to take the job.

4. Society is allocating resources into production through the price system.

5. These descriptions of markets are not very precise.

II-2. The Market

We already defined markets in a very general way as arrangements through which prices guide resource allocation. We now adopt a narrower definition. A market is a set of arrangements by which buyers and sellers are in contact to exchange goods or services.

Some markets (shops and fruit stalls) physically bring together the buyer and the seller. Other markets (the London Stock Exchange) operate chiefly through intermediaries (stockbrokers) who transact business on behalf of clients. In supermarkets, sellers choose the price, stock the shelves, and leave customers to choose whether or not to make a purchase. Antique auctions force buyers to bid against each other with the seller taking a passive role.

Although superficially different, these markets perform the same economic function. They determine prices that ensure that the quantity people wish to buy equals the quantity people wish to sell. Price and quantity cannot be considered separately. In establishing that the price of a Rolls Royce is ten times the price of a small Ford, the market for motor cars simultaneously ensures that production and sales of small Fords will greatly exceed the production and sales of Rolls Royse. These prices guide society in choosing what, how, and for whom to purchase.

To understand this process more fully, we require a model of a typical market. The essential features on which such a model must concentrate are demand, the behaviour of buyers, and supply, the behaviour of sellers. It will then be possible to study the interaction of these forces to see how a market works in practice.

 

Demand

спрос на капитал; требование наличных денег; потребность в деньгах; спрос опережает производство; пользоваться спросом; удовлетворять спрос; оживлённый спрос; спрос на средство потребления; текущий спрос; устойчивый спрос; нехватка жилья; спрос на рабочие места; низкий уровень спроса; общественный спрос.

Supply

спрос и предложение; товарный запас; обеспеченность рабочей силой; снабжение рынка; совокупное предложение; критический уровень запасов; прямые поставки; эластичное предложение; совместная поставка двух и более товаров; общий объём предложения; резервный запас; недостаточный запас; предложение удовлетворяет спрос; иметься в избытке; истощить запасы.

Price

устанавливать цену; не допускать роста цен; средняя цена; цена производства; договориться о цене; цена подлежит скидке; высокая/низкая цена; сбивать цену; рыночная цена; оптовая цена; розничная цена; мировая цена; трансфертные цены; неконтролируемые цены; цена поставки; стабильные цены; продажная цена; соотношение цен; поштучная оплата; закупочная цена; умеренная цена; цена в условиях свободного рынка; равновесная цена.

Market

на рынке; спекулировать (играть на бирже); удовлетворять требованиям рынка; рынок капитала; оживлённый рынок; Европейское Экономическое сообщество; господствовать на рынке; внутренний рынок; рынок акций; рынок по сделкам на срок; появиться на рынке; насыщенный рынок; закрытый рынок; внешний рынок; инвестиционный рынок; рынок труда; фондовая биржа.

Equilibrium

экономическое равновесие; равновесие спроса и предложения; неустойчивое равновесие; равновесие на рынке рабочей силы; рыночное равновесие; устойчивое равновесие; равновесие платёжного баланса.

Prices in a Market Economy

Prices perform two important economic functions: They ration scarce resources and they motivate production.

As a general rule, the more scarce something is, the higher its price will be, and the fewer people will want to buy it. Economists describe this as the rationing effect of prices. In other words, since there is not enough of everything to go around, in a market system goods and services are allocated, or distributed, based on their price. Did you ever attend an auction or see one conducted on TV? What you saw was the rationing effect of prices in action. The person leading the sale (the auctioneer) offered individual items for sale to the highest bidder. If there was only one item, it went to the single highest bidder. If there were two items, they went to the two highest bidders, and so on.

Prices increases and decreases also send messages to suppliers and potential suppliers of goods and services. As prices rise, the increase serves to attract additional producers. Similarly, price decreases drive producers out of the market. In this way prices encourage producers to increase or decrease their level of output. Economists refer to this as the production-motivating function of prices.

But what causes prices to rise and fall in a market economy?

Demand

The Law of Demand. Demand is a consumer’s willingness and ability to buy a product or service at a particular time and place. If you would love to own a new pair of athletic shoes but can’t afford them, economists would describe your feeling as desire, not demand. If however you had the money and were ready to spend it on shoes, you would be included in their demand calculations.

The law of demand describes the relationship between prices and the quantity of goods and services that would be purchased at each price. It says that all else being equal, more items will be sold at a lower price than at a higher price.

Suppose that last April two of your friends developed their own special recipe for homemade ice cream, and they decided to sell ice cream cone to students every day after school. They conducted a survey to see if students were interested in the idea. Each student was asked the following question: “Would you spend $.50 to have an ice cream cone for an after-school snack?” This question was repeated using higher and higher prices up to $2 per cone.

The Demand Schedule. The results of the survey were assembled in a demand schedule, a table showing the quantities of a product that would be purchased at various prices at a given time.

Demand Schedule for Ice Cream Cones Near Your School, April 1
Price Per Cone	Quantity Demanded
$.50
$.75
$1.00
$1.25
$1.50
$1.75
$2.00

 

Why Demand Behaves the Way It Does. The survey results illustrate the law of demand in action. As you can see, the number of ice cream cones that students were ready, willing and able to buy was greater at the lowest prices than at the higher prices. Demand behaves the way it does for some of the following reasons.

Ø More people can afford to buy an item at a lower price than at a higher price.

Ø At a lower price some people will substitute ice cream cones for other items (such as candy bars or soft drinks), thereby increasing the demand.

Ø At a higher price some people will substitute other items for ice creams.

Ø How many ice cream cones can you eat? Some people will eat more than one if the price is low enough. Sooner or later, however, we reach the point where enjoyment decreases with every bite no matter how low the cost. What is true of ice cream applies to most everything. After a certain point is reached, the satisfaction derived from a good or service will begin to diminish. Economists describe this effect diminishing marginal utility. “Utility” refers to the usefulness of something. Thus “diminishing marginal utility” is the economist’s way of describing the point reached when the last item consumed will be less satisfying than the one before.

Diminishing marginal utility helps to explain why lower prices are needed to increase the quantity demanded. Since your desire for a second cone is bound to be less than it was for the first, you are not likely to buy more than one, except at a lower price. At even lower prices you might be willing to buy additional cones and give them away.

 

The demand curve illustrates the demand for ice cream cones that day in April. It also enables us to estimate what the demand would be for those prices falling in between the prices we surveyed. Although the students were not questioned about how many cones they would buy if the selling price were $1.60, the curve lets us estimate the number would be about 55.

Demand for Ice Cream Cones Near Your School

Price per cone

0 25 50 75 100 125 150 175 200

Number of cones

Elasticity of Demand.

The shape and slope of demand curves for different products are often quite different. If, for example, the price of a quarter of milk were to triple, from $.80 to $2.40 a quart, people would buy less milk. Similarly, if the price of all cola drinks were to jump from $1 to $3 a quart (an identical percent increase), people would buy less cola. But even though both prices changed by the same percentage, the decrease in milk sales would probably be far less than the decrease in cola sales. This is because people can do without cola more easily than they can do without milk. The quantity of milk purchased is less sensitive to changes in price than is the quantity of cola. Economists would explain this by saying that the demand for cola is more elastic than the demand for milk. Elasticity describes how much a change in price affects the quantity demanded.

How Elasticity is Measured. When the demand for an item is inelastic, a change in price will have a relatively small effect on the quantity demanded. When the demand for an item is elastic, a small change in price will have a relatively large effect on the quantity demanded.

Elasticity can also be measured by the "revenue test." Total revenue is equal to the price times the number of units sold. If, following a price increase, total revenue falls, the demand would be described as elastic. If total revenue were to increase following a price increase, the demand would be inelastic.

Similarly, if total revenue increased following a price decrease, demand would be elastic. If the price decrease led to a decrease in total revenue, the demand for the item would be described as inelastic.

Super Sally's Supermarket sells 500 quarts of milk and 100 quarts of cola daily. At $.80 a quart she grosses $400 on her milk sales, and at $1 a quart she grosses $100 on her cola. Last week she increased the prices on the milk and cola by 50 percent— milk sold for $1.20 a quart, and cola for $1.50. Following the price increases, milk sales slipped to 350 quarts daily, while soda sales dropped to 35 quarts.

Total revenue from the sale of milk increased (to $420) following the price increase because the demand for milk is inelastic. Total revenue from the sale of cola fell (to $52.50), and for that reason we can say that the demand for cola is elastic.

 

 

Why the Demand for Some Goods and Services Is Inelastic. The demand for some goods and services will be inelastic for one or more of the following reasons:

Ø They are necessities.

Ø It is difficult to find substitutes. Cola drinkers can switch to other soft drinks, but there are few substi­tutes for milk.

Ø They are relatively inexpensive. People are less apt to change their buying habits when the price of some­thing that is relatively inexpensive is increased or decreased. If, for example, the price of an item were to double from 10 cents to 20 cents, it would have less of an effect on demand than if the price had gone from $250 to $500.

Ø It is difficult to delay a purchase. When your car is running out of gas, it is not always possible to shop for the best deal.

Changes in Demand. Until now, we have been describing the relationship between an item's price and the quantity of an item people will purchase. Sometimes things happen that change the demand for an item at each and every price. When this occurs, we have an increase or a decrease in demand.

What are some of the factors that would cause the demand for ice cream, or any other product, to increase or decrease at each and every price?

Substitutes. When two goods satisfy similar needs, they are described as substitutes. A change in the price of one item will result in a shift in the demand for a substitute. Black and brown shoes are close substitutes. If the price of black shoes goes up, then people will tend to substi­tute brown shoes for black shoes, and the demand curve for brown shoes will shift out at every price. If the price of black shoes goes down, then people will tend to substi­tute black shoes for brown shoes, and the demand curve for brown shoes will shift in at every price.

Complementary goods. Goods that are often consumed together, like peanut butter and jelly, are complements. If the price of peanut butter should increase, the quantity of peanut butter consumed will decrease. Since peanut butter and jelly are consumed together, the quantity of jelly demanded at each and every price will also decline, and the demand curve for jelly will shift in.

 

What are some other factors that might cause the demand for ice cream your friends are selling to increase or decrease at each and every price? How would these changes be reflected in the demand curve? The following is a brief list of factors that might affect the curve:

Ø Change in the environment. It is a much hotter month than usual.

Ø Change in the item’s usefulness. The Surgeon General of the United States issues a report that states ice cream is good for you and enhances your attractiveness.

Ø Change in income. Allowances are raised as an economic boom sweeps your community.

Ø Change in the price of a substitute product. The price of candy decreases.

Ø Change in the price or availability of complemen­tary products.

Ø Change in styles, taste, habits, etc.

 

Price per Cone

If any of these events occurred, the demand schedule would change

in such a way that the quantity demanded at any particular price

would be higher or lower than our original demand schedule

indicates. If the demand were to increase, the curve would shift

outward (Figure). If demand were to decrease, the curve would

shift inward.

 

 

0 50 100 150 200 250 300

Number of cones

Supply

Thus far we have only spoken about the effects of prices on buyers. But it takes two parties to make a sale: buyers and sellers. To the economist supply refers to the number of item that sellers will offer for sale at different prices at a particular time and place. A supply schedule is a table summarizing this information. Table below is the supply schedule that was in effect that day in April when your friends conducted their survey. It tells us how many ice cream cones they were willing to sell the students at the prices indicated.

The Law of Supply. As the supply schedule indicates, more ice cream cones would be offered for sale at higher prices than at lower ones. This is in keeping with the law of supply which states that sellers will offer more of a product at a higher price and less at a lower price.

Why does the quantity of a product supplied change if its price rises or falls? The answer is that producers supply things to make a profit. The higher the price, the greater the incentive to produce and sell the product. If ice cream prices around your school are high, your friends may buy a larger ice cream maker so they can produce and sell more ice cream. Addi­tionally, if word gets out that ice cream sells for a relatively high price near your school, other vendors will be tempted to leave their present locations and come to your high school in the belief that they can make more profit.

Supply Schedule for Ice Cream Cones Near Your School, April 1
Price Per Cone	Quantity Supplied
$.50
$.75
$1.00
$1.25
$1.50
$1.75
$2.00

 

Our supply schedule is based on holding variables other than price at some fixed or constant level. On this basis we can use the supply schedule to draw the supply curve (Figure below).

Number of cones

 

0 50 100 150 200 250 300

Number of cones

As in the case of demand, supply curves need not be straight lines. Unlike demand, the typical supply curve slopes upward from left to right.

Changes in Supply. When supply changes, the entire supply curve shifts either to the right or to the left. This is simply another way of saying that sellers will be offering either more (if supply has increased) or less (if supply has decreased) of an item at every possible price. Any or all of the following changes are likely to affect the quantities supplied.

Ø Changes in the cost of production. If it costs sellers less to produce their products, they will be able to offer more of them for sale. An increase in production costs will have the opposite effect — supply will decrease.

Ø Other profit opportunities. Most producers can make more than one product. If the price of a product they have not been producing (but could if they chose to) increases, many will shift their output to that product. For example, as personal computers increased in popularity, a need developed for computer stands. As a result, many furniture manufacturers began to produce desks and carts specifically designed for the computer market. |

Ø Future expectations. If producers expect prices to increase in the future, they may increase their production now to be in position to profit later. Similarly, if prices are expected to decline in the future, producers may reduce production, and supply will fall.

Changes in supply are illustrated graphically in Figure 6.

Price per Cone

The price at which supply exactly equals demand is known as the market price, or the point of equilibrium. In the table above, the market price would be $1.00 because at that price the quantity of ice cream cones demanded and the quantity supplied are exactly equal. Figure 8 represents this information graphically.

School

Number of cones

Equilibrium

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