U n I t 12

Text A

Prices play an important role in all economic markets. If there were no price system, it would be impossible to determine a value for any goods or services. In a market economy prices act as signals. A high price, for example, is a signal for producers to produce more and for buyers to buy less. A low price is a signal for producers to produce less and for buyers to buy more. Prices serve as a link between producers and consumers. Prices, especially in a free market system, are also neutral. That is, they favour neither the producer nor consumer.

Instead, they come about as a result of competition between buyers and sellers. The price system in a market economy is surprisingly flexible. Unforseen events such as weather, strikes, natural disasters and even war can affect the prices for some items. When this happens, however, buyers and sellers react to the new level of prices and adjust their consumption and production accordingly. Before long, the system functions smoothly again as it did before. This flexibility to absorb unexpected «shocks» is one of the strengths of a free enterprise market economy.

In economic markets, buyers and sellers have exactly the opposite hopes and intentions. The buyers come to the market larger to pay low prices. The sellers come to the market hoping for high prices. For this reason, adjustment process must take place when the two sides come together. This process almost always leads to market equilibrium — a situation where prices are relatively stable and there is neither a surplus nor a shortage in the market.

Comments

1. to come about — з’являтися

2. ... adjust their consumption and production accordingly — ... таким чином регулюють споживання і виробництво

3. before long — потім

5. a surplus — залишок

6. a shortage — нестача

at a price /at a high cost — за високою ціною

contract price — договірна ціна

cost price — собівартість

free-market price — ціна за умов вільної конкуренції

pricing — калькуляція цін

purchase price — купівельна ціна

retail/wholesale price — роздрібна/оптова ціна

security price — курс цінних паперів

to keep the prices down — не допускати підвищення цін

to set/fix a price — призначати ціну

Text B

In most economic systems, the prices of the majority of goods and services do not change over short periods of time. In some systems it is of course possible for an individual to bargain over prices, because they are not fixed in advance. In general terms, however, the individual cannot change the prices of the commodities he wants. When planning his expenditure, he must therefore accept these fixed prices. He must also pay this same fixed price no matter how many units he buys. A consumer will go on buying bananas for as long as he continues to be satisfied. If he buys more, he shows that his satisfaction is still greater than his dislike of losing money. With each successive purchase, however, his satisfaction compensates less for the loss of money.

A point in time comes when the financial sacrifice is greater than the satisfaction of eating bananas. The consumer will therefore stop buying bananas at the current price. The bananas are unchanged; they are no better or worse than before. Their marginal utility to the consumer has, however, changed. If the price had been higher, he might have bought fewer bananas; if the price had been lower, he might have bought more.

It is clear from this argument that the nature of a commodity remains the same, but its utility changes. This change indicates that a special relationship exists between goods and services on the one hand, and a consumer and his money on the other hand. The consumer’s desire for a commodity tends to diminish as he buys more units of that commodity. Economists call this tendency the Law of Diminishing Marginal Utility¹.