EXERCISE 1. Translate the following words and word combinations. А. Living standards, to object to sth, to differ with (=AmE from) sb in sth, to sharply disagree with sb / sth

А. Living standards, to object to sth, to differ with (=AmE from) sb in sth, to sharply disagree with sb / sth, we associate sth with sth, in Smith’s view, it earned him a prize [a title, glory and success], to outperform, to exert oneself [every effort all one’s strength] to do sth, supply and demand, self-interest, the heart of his theory is, in quest for profit [adventure], to call for sth, in that way, pertaining to sth, instead, more importantly, to take steps to do sth, commuter, maintenance crew, public goods, (public) plaza, to levy a tax, toxic wastes, subsidy, those in need, food stamps, inventor, experience has shown that.

B. Спрос и предложение, актуальный, архив, в погоне за прибылью, ознаменовывать; исторические документы, относящиеся к тому периоду; прилагать усилия [напрячь все силы], суть [сущность, краеугольный камень], эгоизм, с точки зрения Смита, в поисках приключений, в целом, напротив, таким образом; гораздо важнее (отметить), что; предпринять меры; житель пригорода, работающий в городе и ежедневно ездящий на работу; ремонтная бригада, товар общественного пользования, (амер.) сквер [зона отдыха], облагать налогом, токсичные отходы, дотация [субсидия], нуждающиеся, талоны на льготную покупку продуктов [талоны на питание], изобретатель; опыт показывает, что.

EXERCISE 2. Translate the following sentences.

А. 1.We associate the word perestroika with the name of Mikhail Gorbachev. 2. His discovery marked a new era in science. 3. The greater the output, the greater the nation’s wealth. 4.No theory can benefit society as a whole. 5. Today's economists are divided over government's role. 6. In this case quite the opposite is true. 7. The federal government has taken steps to encourage competition. 8. Experience has shown that government can do much to stabilize the economy.

Б. 1.В основе его теории лежит принцип невмешательства государства в экономику. 2. Гораздо более важен тот факт, что его теория остается актуальной до сих пор. 3.Напротив, он категорически возражал против этого предложения. 4.Его открытие принесло ему звание лауреата Нобелевской премии в области физики. 5.Если конкуренция отсутствует, то верно обратное. 6.Правительство предприняло шаги, направленные на стабилизацию экономики. 7.По дороге жители пригородов видят светофоры, дорожные знаки и ремонтные бригады. 8.Программы для нуждающихся подразделяются на две категории.

EXERCISE 3. Answer the following questions (all the answers must be translated).

· How does the American economic system answer the What, How and Who questions?

· Why are private property, the price system and competition called the “pillars of free enterprise”?

· How do profits, economic self-interest and other incentives keep the economy moving?

· What is the role of government in the American economic system?

EXERCISE 4. Prepare short reports on the following topics. The reports are to be translated in the class.

· Economic ideas of Adam Smith.

· The role of government in the American economy.

· The role of government in the Russian economy.

3. SUPPLY, DEMAND AND MARKET PRICE

The History of Economic Thought

Alfred Marshall (1842-1924)

Price Theory Pioneer

Photo: Historical Pictures Service, Chicago.

The topics discussed in this chapter had their origins in the writings of the great English economist Alfred Marshall. His textbook Principles of Economics (1890), and the doctrines that it discussed, became the standard for the teaching of that subject until well into the 1940's. Marshall spent most of his adult life as a professor of economics at Cambridge University. His most famous pupil, John Maynard Keynes, described Marshall as "the greatest economist of the 19th century." Interestingly, Keynes went on to become the most influential economist of the 20th century.

Marshall is best known for the order that he made out of the theories of the earlier "classical economists" like Adam Smith, David Ricardo and John Stuart Mill. ("Classical" is the name given by modern economists to the theories of those whose views were most widely held during the 75 years following the publication of The Wealth of Nations.) Despite the passage of 100 years since the publication of his Principles, his analysis of market forces is still relied upon to explain economic events.

In Marshall's world, economic events could be explained in terms of the equilibrium market price resulting from the interaction of supply and demand. One of Marshall's lasting contributions was differentiating between supply and demand in the short run and the long run. Comparing the two forces to the blades of a scissors, he argued that neither could func­tion without the other. But, just as (depending on how the scissors is held) one blade can be more active than the other, so supply and demand vary in importance in the long and short run. In the short run, the quantity of available goods is more or less fixed (because crops have been planted, production schedules set, etc.). Therefore it is the demand for those items that will be most influential in determining their price. In the long run, he went on, the opposite is true. Both farmers and businesses can add to or reduce their production facilities as the needs dictate. In that way the supply side of the market becomes most influential in deter­mining price.

How The Price System Answers the What, How And Who Questions

We have said that the American economic system is described as a price directed market system. That is, when supply and demand operate freely, the prices they generate provide the answers to the What, How, and Who questions.

What Goods and Services will be Produced. The demand for a particular item can be described in a demand schedule or demand curve. Since producers are in business to earn profits, their decision to produce specific goods and services will depend on their ability to earn a profit at a price consumers are willing to pay and a quantity they will buy. If consumer demand increases, more items will be provided at the higher price. If demand decreases, the opposite will occur.

Of course, producers are free to ignore consumer demand and produce as much or as little as they choose. But those who produce goods to sell at prices consumers are not willing to pay will suffer financial loss. So, too, will those who produce less than they might have sold at the market price.

How Goods and Services will be Produced. The market system answers the How question by rewarding those who reduce their production costs and punishing those who do not. We can illustrate this with the following hypothetical example.

Annamayshunn, Inc. manufactures joy sticks that whole­sale for $15 through computer stores and other outlets. (Joy sticks are devices used to control the animated characters in many computer games.) At the present time, the company relies exclusively upon hand assembly, and its production costs average $12 per unit.

Recently, Annamayshunn, Inc. learned of a machine that could be used to reduce the amount of hand labor required to assemble joy sticks. The company's engineers have calculated that the machine would enable the firm to lower production costs for that item by 25 percent, to $9 per unit. Based on their recommendations, Anna Shunn, the firm's president, has decided to alter production methods by investing in one of the new machines.

Can you see why Annamayshunn, Inc. might decide to revise the way it manufactures joy sticks? With production costs at $9, the company stands to double its profits from $3 to $6 per unit at the current market price.

Even if the market price should fall, Annamayshunn's reduced costs will enable it to sell its goods at a lower price. For example, let's suppose that other joy stick manufacturers also reduce their costs and as a result the supply of joy sticks is increased. As you know, an increase in supply reduces market price and, sure enough, the market price of joy sticks falls from $15 to $12 per unit.

Fortunately Annamayshunn, Inc., can operate profitably at the new market price. Had it not changed its production methods, it might have had to go out of the joy stick business.

Who will Receive the Goods and Services that are Produced?

Market prices provide a means of rationing the economy's scarce resources. That is, they help determine who will receive goods and services and who will not.

In some countries, prices are set by the government. When that happens, the economy can be faced with either shortages or surpluses. Shortages occur when the established price is below the market equilibrium. At those points, there are more buyers than there are sellers, and some other way needs to be found to allocate resources. It may be on a first-come, first-served basis, in which case there are likely to be long lines at the stores. Or the government may decide to institute some kind of rationing (as was done by our government during World War II). Government rationing often leads to the crea­tion of black markets and other efforts to circumvent (get around) the system.

Summary

Market economies are directed by prices. As the price of an item rises, sellers are encouraged to increase production, and consumers are discouraged from purchasing the item. When the price falls, the opposite is true. In this way prices send out “signals” to buyers and sellers, keeping the economy responsive to the forces of supply and demand.

In a free market economy, prices are determined by the interaction of the forces of supply and demand. Perfectly competitive markets are those in which many buyers and sellers, with full knowledge of market conditions, buy and sell products that are identical to one another.

Demandis the quantity of goods or services that buyers would purchase at all possible prices. Demand varies inversely with price. That is, at a higher price fewer items would be bought than at a lower one. The degree to which price changes affect demand will depend upon the elasticity of demand for a particular item.

Supply, which is the quantity of goods or services that sellers would offer for sale at all possible prices at a particular time and place, varies directly with price. In other words, at a higher price, more goods and services will be offered for sale than at a lower one, and vice versa.

The price at which goods and services actually change hands is known as the equilibrium, or market price. It is the point at which the quantity demanded exactly equals the quantity supplied. Market price can be represented graphically as the point of intersection of the supply and demand curves.

Shifts in demand or supply will affect market price. When everything else is held constant, an increase in demand will result in an increase in market price, and vice versa. Similarly, an increase in supply will result in a decrease in price, and vice versa.