The economic system
There are many forms of economic order, ranging from the mixed private enterprise system to partially or completely controlled economies. Regardless of their form, however, economic system is the system that a society uses for allocation and distribution of scarce resources. Private enterprise means that decisions about what and how much to produce are left to the discretion of owners and managers. In controlled economies such decisions are the responsibility of some governmental agency. There is, of course, no economy today that is completely free of governmental influence. The question then is a matter of degree.
Among the functions of the economic order the most important one is to provide some means of resource allocation. In a private enterprise this function is basically performed by the price mechanism. This simply means that demand for and supply of goods and services interact to set their market price. In the case of regulated utilities, there are governmental agencies that determine the rates that may be charged by utility companies
Without a system of distribution economy simply could not exist. A major part of this distribution system is credit. Economy flourishes on credit or extended methods of payment. Such a system literally affects every link in the distribution chain from the supplier of raw materials to the ultimate consumer.
Economic goals for a nation include price stability, full employment, economic growth, and equitable distribution of income. Price stability contributes to the efficient allocation of resources and facilitates long-term planning. Full employment means that jobs are available for those seeking work. Higher standards of living require increased output per person (economic growth per capita). An equitable distribution of income means that the fruits of the economy are divided in a way that seems fair to the majority of the people.
1. What is an economic system?
2. What functions does economic order perform?
3. What do economic goals for a nation usually include?
T E X T 5
Read the text. Make up the plan and retell the text using your plan.
PROLOGUE TO ECONOMICS
There is almost universal agreement that economies are becoming more and more complex every year. An understanding of how an economy works is more important than ever before. For someone who is just beginning to study economics, the task indeed appears to be a difficult one. The matter is that all societies have more wants than resources, so a system must be devised to allocate these resources between competing ends. Scientists try to find out the best possible ways of solving the problem. Thus, economics is the study of the way in which mankind organizes itself to solve the basic problem of scarcity.
Economics is divided into two major branches: macroeconomics and microeconomics. Macroeconomics is the study of behavior of the economy as a whole with emphasis on the factors that determine growth and fluctuations in output, employment, and the level of prices. Macroeconomics studies broad economic events that are largely beyond the control of individual decision makers and yet affect nearly all firms, households, and other institutions in the economy. Specialists in macroeconomics are particularly interested in understanding those factors that determine inflation, unemployment, and growth in the production of goods and services. Such an understanding is necessary in order to develop policies that encourage production and employment while controlling inflation.
The other major branch of economics is microeconomics. Microeconomics is the study of behavior of individual units within the economy. The division of economics has resulted from the growing complexity and sophistication of economic research.
These two approaches are in fact interdependent. Individuals and firms make their decisions in the context of the economic environment. At the same time, when taken as a whole, their decisions determine the condition of the overall economy. A good understanding of economic events and an ability to forecast them require knowledge of both individual decision making and the way in which individuals react to changes in the economic environment.
T E X T 6
Read the text. Be ready to answer the following questions:
1. What is demand? 2. What is supply? 3. What does the demand (supply) curve represent? 4. What does the intersection of the industry supply and demand curves establish?
HOW THE MARKET ECONOMY WORKS
The central function of every economic system is to allocate its limited resources to satisfy the needs and desires of its people. The amount of goods produced depends upon the amount of resources available and on many other factors. At the same time, the people in a society have a great variety of needs and wants. Some of these, such as the need for food and shelter, always exist. Others, such as the desire to own particular style of clothing, continually change. Economies generally try to maintain a balance between the goods and services available from their producers (supply) and the needs and wants of their customers (demand).
Demand is the quantity of goods or services consumers are willing and able to buy at a given price. Usually the quantity demanded changes as price changes, and we can use a demand curve to represent this change. The demand curve is a graphic representation of the relationship between various prices sellers charge for goods or services and the amount of those goods or services buyers will desire to buy at a certain price. Each point along the curve represents a different price-quantity combination. A demand curve slopes downward from left to right, reflecting the fact that the quantity of a product demanded varies inversely with the price. This is called the law of demand. (See fig. 1)
Fig.1 Demand curve
Supply is the quantity of goods or services marketers are willing and able to sell at a given price at a given period of time. The supply curve graphically represents the amount of goods or services marketers will supply at various prices. A supply curve shows that as prices become more attractive to suppliers (marketers), those suppliers will try to provide more of the good or service. Each point along the curve represents a different price-quantity combination. A supply curve slopes upward from left to right, reflecting the fact that the quantity of a product supplied varies directly with the price. This is called the law of supply. (See fig.2)
Fig.2 Supply curve
The intersection of the supply and demand curves determines the equilibrium price and the equilibrium quantity. Thus, at any price above the equilibrium price, the quantity supplied exceeds the quantity demanded and the price tends to fall. At any price below the equilibrium price, the quantity demanded exceeds the quantity supplied and the price tends to rise. At the equilibrium price, the quantity supplied precisely equals the quantity demanded, and hence there is no tendency for the price to change. (See fig.3)
Fig. 3 Equilibrium point
TEXT 7
Read and translate the following terms: peak, boom, recession, expansion, unemployment rate, downturn, depression, trough, upturn. Read the text and be ready to explain what each of them means.
BUSINESS CYCLES
Business cycles have varying durations and intensities. Why are businesses so interested in the state of the economy? They want to be able to predict whether it's going into a contraction or an expansion. Making the right prediction can determine whether the business will be profitable or not.
The top of a cycle is called the peak. A very high peak, representing a big jump in output, is called a boom. Eventually an expansion peaks. When the economy starts to fall from that peak, there's a downturn in business activity. If that downturn persists for more than two consecutive quarters of the year, that downturn becomes a recession. In a recession the economy isn't doing so great; many people are unemployed and a number of people are depressed.
A large recession is called a depression. In general, a depression is much longer and more severe than a recession. Economists joke, "When your neighbor is unemployed, it's a recession; when you're unemployed, it's a depression." It is generally accepted that if unemployment exceeds 12 percent for more than a year, the economy is in a depression.
The bottom of a recession or depression is called the trough. When the economy comes out of the trough, economists say it's in an upturn. If an upturn lasts two consecutive quarters of the year, it's called an expansion, which leads us back up to the peak. And so it goes.
T E X T 8
Read the text. Divide it into logical parts. Give the title to the text. Make a list of the economic terms used in the text. Be ready to explain what they mean.
A firm generally measures how busy it is by how much it produces. Economists use a corresponding concept, aggregate output, which goes under the name gross domestic product (GDP). GDP is the total market value of all final goods and services produced in an economy in a one-year period. It's probably the single most-used economic measure. The monetary value of all these goods and services can then be added up and compared with that of other countries. Since almost every country uses a different currency, the totals from each country have to be translated—by using currency exchange rates—to compare the size of one country's economy to another. When the international activities of a country's residents are added to GDP, a wider and more global measure of a country's total economic activity is created: gross national product or GNP. GDP and GNP try to measure every legal good and service that an economy produces. Government policymakers and businesspeople use GNP to forecast trends and to analyze the economy’s performance. Although the measure is well entrenched, many economists complain that it is sometimes misleading. The value of all shadow economy, for example, is not reflected in GNP figures. Revenues from illegal transactions are not included because they are not reported. Besides, the value of bartering goods and services cannot easily be measured because money is not used in the transactions.
Look through the text once again and answer the following questions:
1. How does a firm generally measure its activity?
2. What concept is used to measure how well the aggregate economy is doing?
3. What is the best way to measure the growth of the economy?
4. The totals from each country have to be translated by using currency exchange rates. What for?
5. What does GNP measure?
6. What is GNP used to forecast?
7. Why do many economists complain that GNP is sometimes misleading?