Английский язык экономика. Учебно-методическое пособие по научно-техническому переводу, аннотированию и реферированию

the UK, an excise duty of £3 a gram would raise up to £5 billion a year in tax revenue. It would also reduce the £1.4 billion currently spent enforcing anti-drugs laws, and the £1.5 billion cost of drug-related crime.

Sources: G.S. Becker and G.N. Becker, The Economics of Life, McGraw-Hill, 1997;

The Observer, 8 July 2001.

Assignments

1.Give your reasons for and against anti-drugs laws.

2.Mind prohibition of alcohol conducted both in the USA and the former Soviet Union. Was it effective? Write a composition to express your opinion in about 25–30 sentences.

3.Discuss in your group.

Economics analyses what, how and for whom society produces. How are the problems, what how and for whom, settled within your own family?

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UNIT 2

Part 1. Text Pure Monopoly

The perfectly competitive firm is too small to worry about the effect of its own decisions on industry output. In contrast, a pure monopoly is the entire industry.

A monopolist is the sole supplier or potential supplier of the industry’s output.

A sole national supplier need not be a monopoly. If it raises prices, it may face competition from imports or from domestic entrants to the industry. In contrast, a pure monopoly does not need to worry about potential competition.

Profi t-maximising output

To maximise profits, a monopolist chooses the output at which marginal revenue MR equals marginal cost MC, then checks that it is covering average costs. Fig. 2 shows the average cost curve AC with its usual U- shape. Marginal revenue MR lies below the down-sloping demand curve DD. The monopolist recognizes that, to sell extra units, it has to lower the price, even for existing customers.

Fig. 2. The monopolist’s decision

Setting MR = MC, the monopolist chooses the output Q1. The demand curve DD implies that the monopolist sells Q1 at a price P1 per unit. Profit

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per unit is thus (P1 = AC1), price minus average cost at the output Q1. Total profit is the area (P1 = AC1)×Q1.

Even in the long run, the monopolist continues to make these monopoly profits. By ruling out the possibility of entry, we remove the mechanism by which profits are competed away in the long run by additional supply.

Price-setting

A competitive firm is a price-taker, taking as given the price determined by supply and demand at the industry level. In contrast, the monopolist is a price-setter. Having decided to make Q1, the monopolist quotes a price P1 knowing the output Q1 will be bought at this price.

When demand is elastic, lower prices increase revenue by raising quantity demanded a lot. When revenue rises, the marginal revenue from the extra output is positive. Conversely, when demand is inelastic, marginal revenue is negative. To raise quantity demanded, prices must be cut so much that total revenue falls.

To maximise profits, a monopolist sets MC = MR. Since MC is always positive, MR must be positive. But this means that demand is elastic at this output. Hence, in Fig. 2, the chosen output must lie to the left of Q2. A monopolist will never produce on the inelastic part of the demand curve where MR is negative.

Monopoly power

At any output, price exceeds a monopolist’s marginal revenue since the demand curve slopes down. In setting MR = MC, the monopolist sets a price above marginal cost. In contrast, a competitive firm equates price and marginal cost, since its price is also its marginal revenue. A competitive firm cannot raise price above marginal cost. It has no monopoly power.

Monopoly power is measured by price minus marginal cost.

Changes in profi t-maximising output

Fig. 2 may also be used to analyse the effect of changes in costs or demand. Suppose higher input prices shift the MC and AC curves up. The higher MC curve must cross the MR curve at a lower output. The cost increase must reduce output. Since the demand curve slopes down, lower output induces a higher equilibrium price.

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Similarly, with the original cost curves, an upward shift in demand and marginal revenue curves means that MR now crosses MC at a higher output. The monopolist raises output.

Discriminating monopoly

Thus far, all consumers were charged the same price. Unlike a competitive industry, where competition prevents any individual firm charging more than its competitors, a monopolist may be able to charge different prices to different customers.

A discriminating monopoly charges different prices to different buyers. Consider an airline monopolising flights between London and Rome.

It has business customers whose demand curve is very inelastic. They have to fly. Their demand and marginal revenue curves are very steep. The airline also carries tourists whose demand curve is much more elastic. If flights to Rome are too dear, tourists can visit Athens instead. Tourists have much flatter demand and marginal revenue curves. The airline will charge the two groups different prices. Since tourist demand is elastic the airline wants to charge tourists a low fare to increase tourist revenue. Since business demand is inelastic the airline wants to charge business travellers a high fare to increase business revenue.

Profit-maximising output will satisfy two separate conditions. First, business travellers with inelastic demand will pay a fare sufficiently higher than tourists with elastic demand that the marginal revenue from the two separate groups is equated. Then there is no incentive to rearrange the mix by altering the price differential between the two groups. Second, the general level of prices and the total number of passengers are chosen to equate marginal cost to both these marginal revenues. This ensures that the airline operates on the most profitable scale as well as with the most profitable mix.

When a producer charges different customers different prices we say it price discriminates. There are many examples in the real world. Rail operators charge rush-hour commuters a higher fare than mid-day shoppers whose demand for trips to the city is much more elastic. Price discrimination often applies to services, which must be consumed on the spot, rather than to goods, which can be resold. Price discrimination in standardised goods will not work. The group buying at the lower price resells to the group paying the higher price, undercutting the price differences. Effective price discrimination requires that the submarkets can be isolated from one another to prevent resale.

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Fig. 3 illustrates perfect price discrimination where it is possible to charge every customer a different price for the same good. If the monopolist charges every customer the same price, the profit-maximising output is Q1, where MR equals MC, and the corresponding price is P1. If the monopolist can perfectly price discriminate, the very first unit can be sold for a price E. Having sold this unit to the highest bidder, the customer most desperate for the good, the next unit is sold to the next highest bidder, and so on. In reducing the price to sell that extra unit, the monopolist no longer reduces revenue from previously sold units. The demand curve is the marginal revenue curve under perfect price discrimination. The marginal revenue of the last unit is simply the price for which it is sold.

Fig. 3. Perfect price discrimination

A perfectly price discriminating monopolist produces at C where MC = DD which is now marginal revenue. Price discrimination, if possible, is always profitable. In moving from the uniform pricing points to the price discriminating point C, the monopolist adds the area ABC to profits. This is the excess of additional revenue over additional cost when output is higher.

The monopolist makes a second gain from price discrimination. Even the output Q1 now brings in more revenue than under uniform pricing. The monopolist also gains the area EP1A by charging different prices, rather than the single price P1, on the first Q1 units. Economic consultants often earn their fees by teaching firms new ways in which to price discriminate.

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Notice too that whether or not the firm can price discriminate affects its chosen output by affecting its marginal revenue. In the extreme case, perfect price discrimination leads to the same price and output as under perfect competition, since in both cases the firm then sets

MC = MR = P.

Monopoly and technical change

Joseph Schumpeter (1883–1950) argued that, even with uniform pricing, a monopoly may not produce a lower output and at a higher price than a competitive industry, because the monopolist has more incentive to shift its cost curves down.

Technical advances reduce costs, and allow lower prices higher output. A monopoly has more incentive to undertake research and development (R&D), necessary for cost-saving breakthroughs.

In a competitive industry, a firm with a technical advantage has only a temporary opportunity to earn high profits to recoup its research expenses. Imitation by existing firms and new entrants soon compete away its profits. In contrast, by shifting down all its cost curves, a monopoly can enjoy higher profits for ever. Schumpeter argued that monopolies are more innovative than competitive industries. Taking a dynamic long-run view, rather than a snapshot static picture, monopolists may enjoy lower cost curves that lead them to charge lower prices, thereby raising the quantity demanded.

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Exercises

Exercise 1. Suggest the Russian equivalents for the words and word-combinations given below.

Domestic entrants, potential competition, marginal revenue, marginal cost, average cost curve, price-taker, price-setter, competitive firm, profitmaximising output, perfect price discrimination, profitable, excess, costsaving breakthroughts, dynamic long-run view, R&D.

Exercise 2. Find in the text synonyms for the following words.

Productivity, struggle, borderline, income, to decrease, to limit, to maximize, to burden, gainful, benefit, impermanent, spending

Exercise 3. The table shows how words are formed around the verb to compete.

(i)tion

(i)tive ness

(i)tor

ing

Use these words in the suitable blanks in the sentences below.

1.Because of the high exchange rate, our products have lost their ...

2.The government has to reconcile the ... demands for tax cuts and higher public spending.

3.He was unable to work ... .

4.The two companies are in direct ... .

5.Advertising agencies often ... to get a profitable contract.

6.I always shop at that supermarket; its prices are very ... .

7.There were ten ... in the race.

Exercise 4. Calculate the MR curve

A monopolist produces at constant marginal cost of 5 pounds and faces the following demand curve:

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1.What is the equilibrium output? Equilibrium price? What would be the equilibrium price and output for a competitive industry? Why does the monopolist make less output and charge a higher price?

2.In addition to the data above, the monopolist also has a fixed cost of 2 pounds. What difference does this make to the monopolist’s output, price and profits? Why?

Exercise 5. Describe the graph given in Fig. 2.

Exercise 6. Do the written translation of the passage.

“Profit-maximising output ... can be isolated from one another to prevent resale”.

Exercise 7. Review questions.

1.Suppose the government levies a monopoly tax, taking half the monopolist’s profit. a) What effect does this have on the monopolist’s output?

b) What was the marginal profit on the last unit of output before the tax was levied?

c) Does this help you answer a)?

2.Why might a monopoly have more incentive to innovate than a competitive firm? Could a monopoly have less incentive to innovate?

3.Why are these statements wrong?

a)By breaking up monopolies we always get more output at a lower

price.

b)A single producer in the industry is a sure sign of monopoly.

Exercise 8. Look through the text once more, find key-words in it

and write an abstract of the text using the key-words.

Part 2. An insight into how economics applies to the real world

Online Piracy

Widespread and illegal downloading of copyright recordings from the internet has fuelled a boom in the pirate music market, costing copyright owners £3 billion in lost sales in 2000.

Financial Times, 13 June 2001

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New legitimate online distribution services, run by music companies and with proper charges, should help limit music piracy. So should successful court cases against the pirates. The music industry trade body IPFI estimated that 36 per cent of CDs and cassettes were pirated in 2000. IPF1 managed to close down 15 000 illegal websites containing 300000 music files. Downloads from Napster fell from 2.8 billion in February 2001 to a mere 400000 after a US court case.

Assignments

1.Discuss in your group.

What is your attitude towards music and video piracies? Have you ever bought CDs and cassettes pirated?

Give your proposals to protect copyright owners against the pirates in the Internet.

2.Comment on the following.

“Free music is too good to be true. If suppliers cannot rely on payment, eventually they decide not to supply. Then everyone is worse off. The tricky question for society is to get the balance right. With too much copyright and patent protection, music producers make huge profits and we get priced out of music consumption. With too little protection, the industry dries up”.

Write a composition to express your opinion in about 25–30 sentences.

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UNIT 3

Part 1. Text. Imperfect Competition and Market

Structure

Perfect competition and pure monopoly are useful benchmarks of extreme kinds of market structure. Most markets lie between these two extremes. What determines the structure of a particular market? Why are there 10 000 florists but only a handful of chemical producers? How does the structure of an industry affect the behaviour of its constituent firms?

A perfectly competitive firm faces a horizontal demand curve at the going market price. It is a price-taker. Any other type of firm faces a down- ward-sloping demand curve for its product and is an imperfectly competitive firm.

An imperfectly competitive firm recognises that its demand curve slopes down.

For a pure monopoly, the demand curve for the firm is the industry demand curve itself. We now distinguish two intermediate cases of an imperfectly competitive market structure.

An oligopoly is an industry with only a few, interdependent producers. An industry with monopolistic competition has many sellers making products that are close but not perfect substitutes for one another. Each firm then has a limited ability to affect its output price.

Table 1 offers an overview of market structure. As with most definitions, the distinctions can get a little blurred. How do we define the relevant market? Was British Gas a monopoly in gas or an oligopolist in energy? Similarly, when a country trades in a competitive world market, even the sole domestic producer may have little influence on market price.

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