The government and market systems

 

Lead-in: Do you think Governments play an important role in the economy of their countries? Key words and phrases 1. to deliver goods –доставляти товари 2. supply of goods –поставка, запас, пропозиція товарiв 3. merit goods –товари, що уряд заохочує споживати 4. merit bads –товари, що обмежено або заборонено споживати 5. consumption of goods –споживання товарiв 6. total demand –сукупний попит 7. to foster competition –сприяти конкуренцiї

Governments play an important role, even in market econo­mies, for two reasons:

1. Because of the inability of the market mechanism to deliver certain types of goods.

2. Because of weakness in the market system.

The first reason concerns what are known as public goods and services. Once they are provided, their benefits extend to all members of the community. The maintenance of law and order through the police force and the judiciary and national defence through the armed services are good examples.

If the supply of these goods was left to the market mechanism – the result would be an inadequate organisation of these services.

The other reason why governments may intervene is much more complex and raises many controversial issues. Since the market system operates through prices, the government may intervene to subsidise, or even provide free, essentials such as food, housing, medical care and education. Assisting people with low incomes is not the only motive for a government to reduce market prices in this way. It may also wish to actively encourage the consumption of what are known as merit goods (education, for example).

The opposite of merit goods are merit bads – commodities such as drugs and pornography. The consumption of these products should be discouraged by the government. Finally, a competitive market economy, if left unregulated, may be subject to slumps and booms because of the periodic lack of balance between total supply of goods and services and total demand. It may require some form of government action to help correct the situation. However, the extent of government action and its method of intervention are a matter of fierce dispute, not only among politicians and social reformers but also among economists. In his book, “The Wealth of Nations”, A. Smith argued strongly in favour of the competitive market mechanism, whose ‘invisible hand’ coordinated the activities of producers and consumers.

Classical economists believed in maximum individual economic freedom and the minimum government regulation. Although they did acknowledge that where it is not possible to achieve efficiently operating markets then the government should intervene. The object of National intervention was to support and strengthen the market mechanism, not replace it completely.

The opposing view was presented by Karl Marx in a series of books published between 1848 and 1882.Marx stressed the conflicts and crises of the system. All capitalist institutions would finally be replaced by a one-party dictatorship of the proletariat, based on the National ownership of all means of production, distribution and exchange. These concepts inspired the 1917 Bolshevik Revolution and formed, until recently, the basis of Russian political thinking and action. However, Marx has been subjected to many different interpretations. China, Yugoslavia and Cuba have all built systems very different from that of the former USSR - many of which are now being reformed.

On the whole, the functions of the government in economic life can be classified into the following categories:

– to preserve and foster competition

– to regulate monopolies

– to provide information and services to enable the market work better

– to provide certain goods and services

– to assure a sound monetary system

– to promote overall economic stability and growth

Ø Comprehension:

1. Why do governments play an important role in the economy?

2. What is known as merit goods and merit bads?

3. What did classical economists believe in?

4. Who was the opposing view presented by?

5. Name the main functions of the government in economic life.

 

Ø True-false questions:

1. Governments play an important role only in command economies.	
2. If thesupply of public goods and serviceswas left to the market mechanism – the result would be an inadequate organisation of these services.	
3. The consumptionof merit bads should be discouraged by the government.	
4. Classical economists believed in maximum individual economic freedom and the minimum government regulation.	
5. The object of National intervention, according to classical economists, was to replace the market mechanism completely.	
6. One of the functions of the Government in the economic life is to promote overall economic stability and growth.	

Ø Viewpoint:

At the present stage of our economy should the Government actively intervene in it?

HOW MARKETS WORK

 

Lead-in: What types of markets do you know and how do they work? Key words and phrases 1. Stock exchange –фондова бiржа 2. commodity market– товарна бiржа 3. tangible/intangible –материальний, реальний / нематериальний, нереальний 4. demanders and suppliers –споживачи та постачальники 5. allocation of commodities –розподiл, розмiщення товарiв 6. fluctuations in demand –коливання попиту 7. volatile prices –непостiйнi цiни 8. market equilibrium –ринкова рiвновага

Markets are commonly thought of as specific places where buyers and sellers meet: shops, street markets or specialised markets, like Stock Exchanges for shares, or Commodity Markets for goods such as grain, coffee and metals. However, a market is not confined to a particular place. On the Commodity and Stock Markets, for example, the buyers are not usually buying for themselves, but are middlemen acting on behalf of clients scattered throughout the world, with who they are in close contact by telephone and telex. A market may be defined as any area over which buyers and sellers are in contact, directly or through dealers, and where prices obtainable in one part of the area can influence prices in another part.

There are markets for thousands of things. Some of these things are tangible, while others are intangible. These things are referred to as products. So, product markets can be divided into two classes: goods and services.

A good is something tangible that is produced and consumed and purchased in a market. A service is something intangible that is produced and consumed and purchased in a market. Some people come to the market to buy (demanders), others come because they want to sell (suppliers). The interaction of demanders and suppliers determines a market price and market allocation of commodities.

Each of markets has its own special features, called market structure by economists – the characteristics of the buying and selling side and the type of product – which will determine the behaviour of prices. For example, where goods are perishable, such as cut flowers and fruit, prices are more variable than for storable goods. In the latter case, temporary fluctuations in demand can be met by allowing a rise or fall in stock. In a free market the relative price for a commodity increases if there is excess supply, and increases if there is excess demand. The prices of shares and foreign exchange rates may also be volatile for quite different reasons, reflecting frequently revised expectations about future events. A market is in equilibrium when the quantity supplied at a specific price is equal to the quantity demanded at the same market price.

Ø Comprehension:

1. What is a market?

2. What is a good and what is a service?

3. What determines a market price?

4. When do prices increase and decrease in a free market?

5. What is market equilibrium?

 

Ø Text organization.

The Nationalments below express the main ideas of the text. Number them so that they are in the same order as the ideas in the text. The first one is given for you:

	Nationalment	Order
a.	A good is somethingtangible, a service is something intangible.
b.	Some of these things are tangible, while others are intangible.
c.	However, a market is not confined to a particular place.
d.	The interaction of demanders and suppliers determines a market price.
e.	There are markets for thousands of things.
f.	Markets are commonly thought of as specific places where buyers and sellers meet.
g.	A market is in equilibrium when the quantity supplied is equal to the quantity demanded.

Ø Viewpoint:

Do you think the National of market equilibrium stimulates the growth of the market?

 

DEMAND AND SUPPLY

 

Lead-in: What factors influence supply and demand? Key words and phrases 1. demand and supply –попит і пропозиція 2. labour market –ринок працi 3. to offer for sale –пропонувати на продаж 4. homogeneous product –однорiдний, гомогенний товар 5. price elasticity of demand –цінова еластичність попиту 6. quantity demanded –величина попиту 7. elastic demand –еластичний попит 8. necessities and luxuries –предмети першої необхідності та предмети розкоші 9. equilibrium price – цiнарiвноваги

The function of the market is to provide transactions between buyers and sellers, or between the demand side and the supply side. The supply side is made up of firms and the demand side of households or of other firms. In the labour market, it is households which make up the supply side – offering their labour for sale – while production units make up the demand side.

The amount of the goods households will want to buy depends on a broad range of factors. However, one factor, which is likely to influence demand strongly, is the product price. Demand is a consumer’s willingness and ability to buy a product or service. The law of demand Nationals that all else being equal, more items will be sold at a lower price than at a higher price.

Supply varies directly with price. At a higher price more goods and services will be offered for sale than at a lower one, and vice versa.

The laws of supply and demand work most effectively in markets with large numbers of sellers and buyers, who are selling or buying a relatively homogeneous product. In markets that do not possess these features, the forces of supply and demand are determined by the structures prevailing in these markets.

How much the quantity demanded changes in response to price changes is called the price elasticity of demand. The good or service has an elastic demand if the quantity demanded changes considerably, if it is very responsive to changes in price. If the quantity demanded changes little, the good or service has an inelastic demand. Inelastic demand means the quantity demanded responds relatively little to changes in price. Several factors determine if a product has an elastic or inelastic demand schedule. Necessities tend to have an inelastic demand; people find it hard to give up a necessity. Luxuries tend to have an elastic demand, because people can get along without them if the price is too high. The price that equalizes the amount producers want to sell and consumers want to buy is called the market clearing price, or the equilibrium price.

Ø Comprehension:

1. What is the main function of the market?

2. What is the supply side and the demand side?

3. When does supply vary?

4. What is called price elasticity of demand?

5. What goods tend to have elastic demand?

6. What is the market clearing price?

Ø Summarizing.

Complete the following sentences to summarize the text above:

1. The market provides ….

2. Households make up the … side of the market.

3. One of the factors that influence demand is ….

4. The laws of supply and demand work most effectively ….

5. The quantity demanded changes in response to ….

6. The market is in equilibrium when ….

 

Ø Viewpoint:

Give an example when prices for goods were inelastic.

INFLATION AND DEFLATION

Lead-in: What are the main reasons for inflation and deflation? Key words and phrases 1. average price level –середній рівень цін 2. purchasing power –купівельна спроможність 3. unit of account –одиніця розрахунку 4. medium of exchange – засіб обміну 5. fixed money income –фіксований, постійний грошовий дохід 6. inflation premium –інфляційна премія (індексація відсоткової ставки с урахованням інфляції) 7. lenders and recipients –кредитори та одержувачи 8. demand-pull inflation –інфляція попиту 9. cost-push inflation –інфляція витрат 10. aggregate demand –сукупний попит 11. productive capacity –виробнича потужність, можливості 12. price expectations –очікування цін 13. to reduce unemployment –знижувати безробіття

Inflation is an increase in the average price level of the entire economy; deflation is a decrease in the average price level of the entire economy. Prices in some markets can fall even in times of inflation, and prices in some markets (e.g., medical care) can rise even in times of deflation. But it is not the change in individual prices, it is the upward or downward movement in the average prices of all goods and services combined that determines the extent of inflation or deflation.

As the price level rises during inflation, a dollar buys fewer goods and services than before. Hence, inflation reduces the dollar's real purchasing power. As the price level falls during deflation, a dollar buys more goods and services than before. Hence, deflation increases the dollar's real purchasing power. Because money is used as a unit of account and as a medium of exchange in most economies, changes in the purchasing power of money generally have several adverse consequences.

Inflation can produce misleading information in business accounting. Since business is conducted in money terms, figures using changing prices can give deceptive signals.

Inflation hurts people living on fixed money incomes and people who have saved fixed amounts of money for specific purposes such as financing their children's education or their own retirement.

In general, the adverse effects of inflation depend on the extent to which inflation is correctly anticipated and the extent to which it is unanticipated. If inflation is correctly anticipated, contracts can be negotiated to include “inflation premiums”. Such premiums are designed to protect lenders and other recipients of future money payments from declines in the purchasing power of the money to be repaid to them.

Inflation can occur for several reasons, and economists sometimes distinguish between demand-pull inflation and cost-push inflation.

Demand-pull inflation occurs when aggregate demand in the economy increases faster than the economy's productive capacity at full employment. Demand-pull inflation is often described as “too much money chasing too few goods”. Cost-push inflation occurs when higher prices for the factors of production increase costs.

Price expectations and changes in them can also influence the rate of inflation. If consumers think that prices are going to increase, for example, they may rush out to buy before the prices go up.

We have to learn about the process of inflation and about its relation to other macroeconomic problems such as economic growth and unemployment. When conflicts occur, dilem­mas in economic policy arise. Should policy, for example, be aimed at achieving long-run price stability or high employment? Focus on avoiding inflation may mean higher employment. Focus on reducing unemployment may generate increasing in­flation. Such dilemmas are especially hard to deal with because of their political implications: high rates of unemployment or inflation are likely to affect the party in power.

 

Ø Comprehension:

1. What is inflation and what is deflation?

2. What determines the extent of inflation or deflation?

3. What are adverse consequences of inflation?

4. What do adverse effects of inflation depend on?

5. When does demand-pull inflation occur?

6. What happens in case of cost-push inflation?

7. Can price expectations influence the rate of inflation?

Ø True-false questions:

1. Inflation is an increase in the average price level of the entire economy.	
2. In some markets prices can fall even in times of inflation.	
3. Deflation doesn’t increase the dollar’s real purchasing power.	
4. Inflation hurts people living on fixed money incomes.	
5. Economists sometimes distinguish between demand-pull inflation and cost-push inflation.	
6. Price expectations and changes in them can’t influence the rate of inflation.	

Ø Viewpoint:

What social groups are particularly hurt by inflation?