5 Supply, demand and market price

5.1 Read the text

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 a market system goods and services are allocated, or distributed, based on their price.

Price 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? The answer is 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

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.

Demand behaves the way it does for some of the following reasons:

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

Let's see the law of demand from the point of ice-­cream selling.

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

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

How many ice-creams can a man eat? One , two , more? 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 is the cost. What is true of ice-cream applies to most everything. After a certain point is reached, the satisfaction from a good or service will begin to diminish. Economists describe this effect as 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 ice-cream is 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 ice-creams and give them away.

The law of 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 items that sellers will offer for sale at different prices at a particular time and place.

The law of supply 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.

5.2 Study new vocabulary

to ration scarce resources-нормировать недостаточ­ные ресурсы

to motivate production — мо­тивировать производство

rationing effect of prices — нормирующий эффект цен

level of output — уровень производства

to encourage — поощрять

production-motivating fun­ction of prices — мотиви­рующая производство

функция цен

to substitute for — заменять

diminishing marginal utility — уменьшение крайней полезности

to triple — утроить

have a relatively large effect— иметь относительно большое влияние

item's price — цена изделия

shift — сдвиг, смещение

complements - дополнения

availability — зд. наличие

occurred — имел место

incentive — стимул

expectations - ожидания

to profit — получать прибыль

to decline — снижаться

actually — фактически

point of equilibrium — точ­ка равновесия

to prevail — преобладать

5.3 Match these words as they occur in the text

1 ration a) the product

2 motivate b) the quantity demanded

3 diminishing c) a good or service

4 level of d) the point

5 increase or decrease e) other items

6 substitute f) their level

7 reach g) output

8 satisfaction from h) marginal utility

9 increase i) production

10 produce and sell j) scarce resources

5.4 Match these parts of sentences

1. How many ice-creams a) the increase serves to attract additional producers.

2. Similarly, b) the greater the incentive to produce and sell the product.

3. The answer c) applies to most everything.

4. As prices rise, d) can a man eat?

5. The higher the price , e) price decreases drive producers out of the market. market.

6. What is true of ice-cream f) is that producers supply things to make a profit. 7. Economists describe g) this effect as diminishing marginal utility.

5.5 Use the words in this box to complete these sentences

ration scarce resources, Diminishing marginal utility, substitute, a product or service, a lower price, Economists, the law

1.___ ___ ___ helps to explain why lower prices are needed to increase the quantity

1. Let's see ___ of demand from the point of ice-­cream selling.

2. Prices perform two important economic functions: ___ ___ ___and motivate production.

3. ___ describe this effect as diminishing marginal utility.

4. At a higher price some people will ___ other items for ice cream.

5. Demand is a consumer's willingness and ability to buy _ ___ _ ___ at a particular time and place

6. More people can afford to buy an item at _ ___ ___ than at a higher price.

5.6 Answer the questions

1. What roles do prices play in a market economy?

2. What is «demand»?

3. What are increases or decreases in demand?

4. What does «diminishing marginal utility» mean?

5. What is «supply»?

6. How do demand and supply interact to determine prices?

5.7 Match these terms with their definitions

1.Demand	a) a consumer's willingness and ability to buy a product or service at a particular time and place
2. Diminishing marginal utility	b) a certain point is reached, the satisfaction from a good or service will begin to diminish. Economists describe this effect as.
3. Supply	c) number of items that sellers will offer for sale at different prices at a particular time and place.
4. Market price	d) the price at which goods and services actually change hands

5.8 Write an occupation of a person. Compose one sentence with each word

produce
consume
trade
purchase
sell
observe

5.9 Place these sentences in order

The law of supply

The answer is that producers supply things to make a profit. The law of supply states that sellers will offer more of a product at a higher price and less at a lower price. To the economist, supply refers to the number of items that sellers will offer for sale at different prices at a particular time and place. The higher the price, the greater the incentive to produce and sell the product. Why does the quantity of a product supplied change if its price rises or falls? 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.