Economic systems
Countries, like people, organize themselves to work. They have different ways of satisfying the needs and wants of people. By now you are aware of the unlimited wants of people and the scarcity of resources.
Any economic system which is an organized way of producing goods and services and of providing a means for people to get them should answer some very important questions. The answers to these quatetions really determine what kind of economic system will result.
They are the follows:
1. What goods and services will be produced?
2= How will those goods and services be produced?
How much to produce?
For whom are the goods and services produced?
The answers to the four basic economic questions make a difference in how people in different countries live. The standard of living - a measure of how well the people in an economic system live - is different in different economic systems. That system which can make good use of its resources and produce many goods and services for its people probably will have a higher standard of living.
A Traditional System
Suppose you lived in a country in which everyone did what his or her mother or father did. If your father is a farmer, you become a farmer. If your mother weaves baskets, you weave baskets. An economic system in which people do things the way they have done them is called a traditional system. The same tools and methods used by parents and grandparents are used by people today,, So most traditional economic systems have found it hard to grow. They fall behind other countries. They use their resources as they always have. They are unwilling to try new things.
A Command System
Sometimes the government of a country gives the answers to what kind of economic system the country will have, The government owns the resources and employs the workers. It decides what workers will do, and what goods and services they will produce. This type of economic system is called a command system. As a rule, in command economies, consumer goods and services rank low on the priority list.A command system may be very successful and produce large amounts of goods and services. The price paid for that success is loss of individual freedom, sometimes of all the people. A command system takes away individual freedom and the government makes many of the decisions.
A Market System
A third way to answer the four basic economic questions is through a market system. In a market system the questions are answered through the market.
What goods and services are produced in a market system? The goods and services that will be sold, that people are willing to buy. Say you raise potatoes and you decide to sell them* You know that for potatoes people will pay a certain price, that is, the amount of money given or asked for when goods or services are bought and sold,;
In a market system, the consumer is all-important. Every
time a consumer buys potatoes, he or she is telling the market to supply more of them.
If a consumer refuses to buy a product or a service, the market receives the message to supply less of it.
A market system will use all the resources - natural resources, labour, and capital goods - to produce goods and services that people will buy.
How much will be produced is another question to be answered by the market system. What will sell is what will be produced. Who will use the goods and services produced? Those who can and want to buy the goods and services will buy them.
Supply is the number or amount of goods and services available at various prices. Demand is the amount of quantity of goods and services that people are willing to buy at various prices. Put them together, supply and demand, and you get an important feature of the market economic system. What happens to the price of swimsuits in September or October? When the demand goes down, what happens to the price and the supply? No one will be willing to produce swimsuits if they have no buyers. Goods and services that are demanded are supplied. If the demand goes down, fewer are supplied. This is the way a market economic system is supposed to work.
Most economic systems in the world today are mixed systems. Mixed systems combine some parts of other systems. There may be a mixture of traditional, command, and market economic systems.
The economy of the USA, for example, is mostly a market system. Northern Korea is closed to the command system. Some African countries have a traditional economic system.
I. VOCABULARY PRACTICE
economic system price
standard of living supply
traditional system demand
command system mixed system market system
An economic system in which people do things in the way they have always done them.
The amount or quantity of goods and service that people are willing to buy at various prices.
An economic system in which the opportunity to buy and sell according to demands made by consumers is the rule.
The measure of how well the people of an economic system live.
An organized way of producing goods and servicers and of providing a means foe people to get them.
An economic system that combines some parts of other systems.
The number or amount of goods and services available at various prices.
The amount of money given or asked for when goods or services are bought and sold*
An economic system in which the government owns all the resources, employs the workers and decides what the workers will do and what goods and services will be produced.
Definitions:
Value: worth, marketable price, estimation.
Cost: price to be paid for a thing
Price: money for which a thing is bought or sold.
Wage(s): payment made or received at regular intervals (usually weekly) for manual or mechanical work or services
Salary: fixed monthly or quarterly payment for regular employment on a yearly basis
Fee: charge or payment for professional advice or services (e.g. doctors, lawyers, private teachers, etc)
Currency: a particular type of money used in a state, total amount in circulation
Hard currency: convertible money
Inflation: fall in value of money, increase in amount of paper money circulating<
rise in level of prices due to relative decrease of purchasing power
Interest rate: a sum paid by the borrower for the use of the sum lent
Monetarism: a financial policy of reducing taxes along with cutting public spending
Text What is economics?
Economics is a social science that seeks to analyze and describe the production, distribution, and consumption of wealth. The areas of investigation in economics overlap with other social sciences, particularly political science, but economics is primarily concerned with relations between buyer and seller.
In spite of many practical benefits, economics is mainly an academic, not a vocational, subject. Unlike accounting, advertising, and marketing, economics is not primarily a how-to-make-money area of study. Knowledge of economics will help you run a business or manage your personal finances. But that is not its primary objective. Instead, economics ultimately examines problems and decisions from the social, rather than the personal, point of view. The production, exchange, and consumption of goods and services are discussed from the viewpoint of society’s best interest, not strictly from the standpoint of one’s own pocketbook.
Economics is a field full of controversy, and even the definition of the field has been a subject of controversy.
What is economics? We might take our definition from the father of modern economics, Adam Smith. He entitled his famous book An Inquiry into the Nature and Causes of the Wealth of Nations. That is not a bad description of the subject matter of economics, but many modern economists have tried to find a more logical or scientific definition.
Smith was, in many ways, the founder of modern economics. He wrote at a time when the industrial revolution was just beginning to transform European society. He observed that, in his own society, economic development could bring about a widespread prosperity, and yet other countries, and even some districts of an advanced country such as Britain, could lag behind in poverty. It was never difficult to account for poverty – poverty had been the condition of most people since the time immemorial – but what could account for this prosperity? This was the question Smith put to himself, and in his time it was the central question of economics.
We will be inquiring into the nature and causes of the wealth of nations, and that inquiry will be our definition and our answer to the question, “What is economics?”
What does it mean to study the nature and causes of the wealth of nations,? In his great book, An Inquiry into the Nature and Causes of the Wealth of Nations, Adam Smith took this question at his first subject: what is it that causes production of goods and services to increase with time, so that nations become wealthy rather than poor? According to Smith, it is “the great multiplication of the productions of all the different arts,… which occasions in a well-governed society”, it is “the universal opulence which extends itself to the lowest ranks of the people”. Smith’s objective was to learn more about the “multiplication of productions”. For him this was the point of economics.
What leads to growing production? Modern economics present different causes of growing production, and the list of them looks like this:
increase in quantities of resources available;
discovery of new technologies;
increases in the division of labour and specialization;
improvements in the allocation of existing resources;
increases in the rate of use of existing resources.
Among the enumerated causes of growing production, modern economists attach special importance to resources.
Notes and Commentary
The subject matter of economics – предмет исследования (суть) экономики (как науки)
Vocabulary
Seller (n) – продавец
Prosperity (n) – процветание, благоденствие
Art (n) – ремесло
Division of labour – разделение труда
Specialization (n) – специализация (труда)
Allocation of resources - распределение ресурсов
Task
Try to identify the most important idea the writer wants to communicate to you in the text.
Task
After you have identified the main idea, find in the text:
the paragraphs (or sentences) that carry the main load of logic and seem closely related to the general idea of the text;
the paragraphs (or sentences) that do not seem related to the general idea of the text.
Give reasons for your choice.
Task
Turn to Text again. Compress it into five or six sentences. Write your summary on a separate sheet of paper.
Text . DIVISIONS AND SCHOOLS OF THOUGHT
Economics, like other studies, can be broken down into more specialized sub-fields. The broadest categories are just two: microeconomics and macroeconomics.
In explaining these two terms, it might help to go back in history a bit. The word “economics” is based on Greek roots, but that is a bit of a humbug, since the Greeks did not have a field of study anything like economics. The two Greek roots of the “economics” are oikos, meaning more or less the household or family estate, and nomos, which can mean rules, natural laws or laws made by the government, but which in this case primarily means “wise saws” or “rules of thumb”. Thus the book Oikonomia, by the Greek author Xnophon, is probably best translated as “rules of thumb for estate management”.
Here’s how the word “economics” evolved to its modern use. By the 1600s, the interdependence of people and nations through markets had grown so great that it was necessary for governments to have carefully thought out policies to deal with the markets. Of these, the most common policy was “mercantilism” – and the essence of mercantilism is to try to sell as much as you can to your neighbours, while limiting what they sell to you, so that they have to pay you in gold. But this policy was criticized by a number of thoughtful scholars, of whom Adam Smith is the most famous. They were engaged in a new specialization: the study of “rules of thumb for the management of the common political household”, which is expressed in the Greek-derived phrase “political economy”. And that is what the new field was called. The Greek root of the word “political” is, of course, polis – the word for the political community, or state.
Adam Smith and his immediate successors, the “classical political economists (as Karl Marx called them) were concerned mostly with the workings of a market economy as a whole. In modern terms, we would say that they were concerned with “macroeconomics”. The new Greek root here is, of course, macro, meaning “big”. Macroeconomics is concerned with economic phenomena which are “big” in the sense that the whole is “big” in relation to its parts.
However, beginning in the 1870s, research in economics took a turn toward a much more analytic approach, and economists began to be concerned with the workings of the parts which make up a market economy: with the workings of markets foe particular goods and services, the functioning of particular companies, and the determinants of demand on the part of individual consumers. This is now called “microeconomics”. The Greek root micro, meaning “small”, tells us that the microeconomist is concerned with economic phenomena which are small in the sense that the parts are small in relation to the whole.
This analytic economics began to see itself (with some reason) as a science, and the term “political” in the phrase “political economy” seemed as embarrassment. So it was dropped, and the ending –ics, as in “physics”, was tacked onto the end of econom-, to make more scientific.
The analytic approach was very successful for a time. The macroeconomic approach of the classical Political Economists never disappeared entirely, but it was, so to say, put on the back burner around 1900. But by 1930 – as the Great Depression got well under way – the analytic approach did not look so good. Many economists felt it was time to go back at least partway to the macroeconomic concerns of the Classical Political Economists. The most famous of these economists is John Maynard Keynes.
By the late 1950s – when Paul Samuelson’s influential Economics textbook appeared – it was clear that there was much that was useful and true in both approaches, and that the economics profession had to be committed to both macroeconomics and microeconomics. Thus, it was necessary to have words for the two great divisions of economics.
Of course, most economists specialize in one or the other. In practice, the microeconomist studies the working of markets for particular goods and services, and the interdependencies among these, and the supplies and demands of individual enterprises and consumers. The macroeconomist studies phenomena which seem to affect or arise from the operation of the market system as a whole: unemployment, inflation, the workings of the monetary system, and the determinants of economic growth.
Notes and Commentary
Xenophon (born 431 BC, Attica, Greece; died shortly before 350 BC, Attica) – Greek historian, author of the Anabasis, Oikonomia, etc.; his prose was highly regarded by literary critics in antiquity and had strong influence on Latin literature
Saw (n) – a maxim (правило поведения, принцип)
Rules of thumb – established principles
To put on the back burner – to receive little attention
Samuelson, Paul Anthony (1915 -) – American economist, awarded the Nobel Prize for Economics in 1970 for his fundamental contributions to nearly all branches of economic theory; his introductory textbook Economics (1948) went into several editions and is considered a classic
Vocabulary
Microeconomics (n, pl treated as sing) – микроэкономика; микроэкономикс
Macroeconomics (n, pl treated as sing) – макроэкономика; макроэкономикс
Monetary system - кредитно-денежная система
Determinants of economic growth – параметры (детерминанты) экономического роста
Task
Work in group of two.
1) Each student should only scan one of the two texts below and take notes in the appropriate section of the Table of Facts.
2) Share information so that either student in your group has the same data and can fill in the Table of Facts completely.
3) Discuss the texts. Reveal identical and contrasting features in the description of one and the same economic phenomenon.
4) Compare your Table of Facts with those of your classmates. Evaluate the different approaches of your fellow-students to the analysis of the text.
Text . KINDS OF ECONOMICS
The subject is usually divided into the disciplines of microeconomics, studying individual producers, consumers or markets, and macroeconomics, studying whole economies or systems. These spheres often overlap, but un practice it is useful to distinguish between the main levels at which economic phenomena are studied.
Straddling both spheres is the sub-discipline of econometrics, which analyzes economic relationships using mathematical and statistical techniques. Increasingly sophisticat6ed econometric methods are today being used for such topics as economic forecasting.
Economic aims to be either positive, presenting objective and scientific explanations of how an economy works, or normative, offering prescriptions and recommendations on what should be done to cure perceived ills.
Microeconomics is the study of individual decision-making units within an economy: a consumer, firm, or industry. It looks at how individual markets work and how individual producers and consumers make their choices and with what consequences. This is done by analyzing how relevant prices of goods are determined and the quantities that will be bought or sold.
The operation of the market is therefore a central concern of microeconomics. Foe simplicity, microeconomics begins by analyzing a market in which there is perfect competition, a theoretical state which exists only when no individual producer or consumer can influence the market price. In the real world, there is always imperfect competition, for various reasons (monopoly practices, barriers to trade, and so on), and microeconomics examines what effect these have on wages and prices. Macroeconomics is the study of whole( aggregate) economies or systems, including such aspects as government income and expenditure, the balance of payments, fiscal policy, inflation, and unemployment. It seeks to understand the influence of all relevant economic factors on each other and thus to quantify and predict aggregate national income.
Vocabulary
Positive economics – позитивная экономика (экономикс)
Normative economics – нормативная экономика (экономиксЭ
Perfect competition – совершенная конкуренция
Imperfect competition – несовершенная конкуренция
Monopoly (n) - монополия
Barriers to trade – торговые барьеры
Expenditure – расходы
Balance of payments – платежный баланс
Aggregate national income – совокупный национальный доход
Text . MACROECONOMICS VERSUS MICROECONOMICS
Economists derive and apply principles about economic behaviour at two levels.
Macroeconomics examines either the economy as a whole or its basic subdivisions or aggregates such as the government, household, and business sectors. An aggregate is a collection of specific economic units treated as if they were one unit. Therefore, we might lump together the millions of consumers in any economy and treat them as they were one huge unit called “consumer”.
In using aggregates, macroeconomics seeks to obtain an overview, or general outline, of the structure of the economy and the relationships of its major aggregates. Macroeconomics speaks of such economic measures as total output, total employment, total income, aggregate expenditures, and the general level of prices in analyzing various economic problems. No or very little attention is given to specific units making up the various aggregates. Macroeconomics examines the forest, not trees.
Microeconomics looks as specific economic units. T this level of analysis, the economist observes the details of an economic unit, or very small segment of the economy, under the figurative microscope. In microeconomics we talk of an individual industry, firm, or household. We measure the price of a specific product, the number of workers employed by a single firm, the revenue or income of a particular firm or household, or the expenditures of a specific firm, government entity, or family. In microeconomics, we examine the trees, not the forest.
The macro-micro distinction does not mean that economics is so highly compartmentalized that every topic can be readily labeled as either macro or micro; many topics and subdivisions or economics are rooted in both. Example: While the problem of unemployment is usually treated as macroeconomic topic (because unemployment relates to aggregate spending), economists recognize that the decisions made by individual workers in searching for jobs and the way specific product and labour markets operate are also critical in determining the unemployment rate.