POSIBNIK_1_KURS

A very important concept in understanding supply and demand theory is elasticity. Robert Pindyck and Daniel Rubinfeld observed in their book

“Microeconomics” that "the demand for a good depends on its price, as well as on consumer income and on the prices of other goods. Similarly, supply depends on price, as well as on variables that affect production cost…. Often, however, we want to know howmuch supply or demand will rise or fall." This measurement of a product or service's responsiveness to market changes is known as elasticity.Todd G. Buchholz, writing in his book “From Here to Economy”: “A Shortcut to Economic Literacy, used an example from the world of sports business to provide an example of economic elasticity: "Will football fans buy the same number of tickets if the team jacks up the prices? If they do, then demand is inelastic. If higher prices lead the fans to cut back their attendance, then demand is elastic, or sensitive to change."

There are three main factors that influence elasticity of supply and demand .

1.The availability of substitutes. This is probably the most important factor influencing the elasticity of a good or service. In general, the more substitutes, the more elastic the demand will be. For example, if the price of a cup of coffee went up by $0.25, consumers could replace their morning caffeine with a cup of tea. This means that coffee is an elastic good because a rise in price will cause a large decrease in demand as consumers start buying more tea instead of coffee.

However, if the price of caffeine were to go up as a whole, we would probably see little change in the consumption of coffee or tea because there are few substitutes for caffeine. Most people are not willing to give up their morning cup of caffeine no matter what the price. We would say, therefore, that caffeine is an inelastic product because of its lack of substitutes. Thus, while a product within an industry is elastic due to the availability of substitutes, the industry itself tends to be inelastic. Usually, unique goods such as diamonds are inelastic because they have few if any substitutes.

2.Amount of income available to spend on the good. This factor affecting demand elasticity refers to the total a person can spend on a particular good or service. Thus, if the price of a can of Coke goes up from $0.50 to $1 and income stays the same, the income that is available to spend on coke, which is $2, is now enough for only two rather than four cans of Coke. In other words, the consumer is forced to reduce his or her demand of Coke. Thus if there is an increase in price and no change in the amount of income available to spend on the good, there will be an elastic reaction in demand; demand will be sensitive to a change in price if there is no change in income.

3.Time. The third influential factor is time. If the price of cigarettes goes up $2 per pack, a smoker with very few available substitutes will most likely continue buying his or her daily cigarettes. This means that tobacco is inelastic because the change in price will not have a significant influence on the quantity demanded. However, if that smoker finds that he or she cannot afford to spend

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the extra $2 per day and begins to kick the habit over a period of time, the price elasticity of cigarettes for that consumer becomes elastic in the long run.

To determine the elasticity of the supply or demand curves, we can use this simple equation: Elasticity = (% change in quantity / % change in price).

It is a measure of relative changes. If elasticity is greater than or equal to one, the curve is considered to be elastic. If it is less than one, the curve is said to be inelastic.

Elasticity varies among products because some products may be more essential to the consumer. Products that are necessities are more insensitive to price changes because consumers would continue buying these products despite price increases. Conversely, a price increase of a good or service that is considered less of a necessity will deter more consumers because the opportunity cost of buying the product will become too high.

A good or service is considered to be highly elastic if a slight change in price leads to a sharp change in the quantity demanded or supplied. Usually these kinds of products are readily available in the market and a person may not necessarily need them in his or her daily life. On the other hand, an inelastic good or service is one in which changes in price witness only modest changes in the quantity demanded or supplied, if any at all. These goods tend to be things that are more of a necessity to the consumer in his or her daily life.

Language notes:

* The phrase "supply and demand" was first used by James Denham-Steuart in his Inquiry into the Principles of Political Economy, published in 1767. Adam

Smith used the phrase in his 1776 book “The Wealth of Nations”, and David Ricardo titled one chapter of his 1817 work “Principles of Political Economy and Taxation” as "On the Influence of Demand and Supply on Price";

Weigh heavily – мати велике значення;

the best combination of goods possible – найкращий вибір товарів; the higher …, the lower …– чим вищий,… тим нижчий;

an upward slope – крива, спрямована вгору.

VOCABULARY FOCUS

Ex.1. Find the English equivalents in the text.

Споживати товари та послуги; традиційна економіка; за умови конкуренції; ринок визначає ціну продукту; насправді куплений чи проданий; не досить лише просто хотіти чи бажати предмет; домашнє господарство; преференції споживача; пересічний громадянин; мати значний вплив на ринок; суть ринкової економіки; справжній попит; відображення попиту та пропозиції; розподіл ресурсів; альтернативнівитрати; бути проданим за певною ціною;ринкова рівновага; наявність замінників; предмет необхідності для споживачів.

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Ex.2. Give Ukrainian equivalents for the following phrases.

To have the power to influence or set price; the operation of supply and demand; the amount of goods and services; to show the ability to pay; consumer preferences; to weigh heavily; to maximize utility; to end up with the best combination; at the other side of; the smallest unit of supply; to make selling decisions; the amount available for sale; the amount purchasers are willing to buy; one of the most fundamental concepts; to be a reflection of; in the most efficient way possible; to show an upward slope; two opposing forces shape the market; fluid equilibrium in a standard market; to be at equilibrium; the percentage change; to vary among products; to be elastic due to availability of substitutes.

Ex.3. Give three forms of the following verbs. Find the sentences with these verbs in the text.

Have, let, mean, buy, pay, show, sell, know, underlie, go, forgo, meet, give, get, understand, become.

Ex.4. Make up noun+noun or adjective+noun collocations (there may be several variants).You can add other word collocations. Give examples either from the text or of your own.

Economic, conventional, decision-making, consumer, demand, market, supply, opportunity, upward, percentage, quantity

Choices, preference, economics, unit, economy, cost, slope, change, relationship, units, demanded.

Model: economic choices

e.g. All societies necessarily make economic choices.

Ex.5. Match up the terms on the left with the definitions on the right.

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Ex.6. Choose an appropriate phrase to complete the following sentences.

The buying behaviour, by way of, which is analogous, the price of a product, would continue buying, weigh heavily, the opportunity cost, to maximize their utility, the amount of a product, in a standard market.

1.For conventional economics, the market answers these questions

_____________ the operation of supply and demand.

2.The market determines _____________ , and the price determines what is produced, and who can afford to consume it.

3.In microeconomics,demand refers to _____________ of a household.

4.Consumer preferences _____________ in a household's buying decisions.

5.All buyers will try _____________ , that is, make themselves as happy as possible, by spending what money they have in the best way possible.

6.The quantity demanded is ________ people are willing to buy at a certain price.

7.In microeconomics, the smallest unit of supply is the firm, _____________ to the demand unit of the household.

8.Because supply and demand can shift and change, equilibrium _____________

is also fluid, responding to changes in either market force.

9.Products that are necessities are more insensitive to price changes because consumers _____________ these products despite price increases.

10.A price increase of a good or service that is considered less of a necessity will deter more consumers because _____________ of buying the product will become too high.

Ex.7. Complete the following sentences with prepositions or adverbs.

1.___ conditions ___ competition, the market determines the price ___ a product.

2.___ microeconomics,demand refers ___ the buying behavior ___ a household.

3.Each household, or small-scale decision-making unit, is affected ____ different factors when making choices ____ what to buy and how much to buy.

4.____ the other side ____ every transaction is a seller.

5.____ considering both their preferences and their budget, the buyers ensure that they end up ____ the best combination ____ goods possible.

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6.Because the household is such a small unit, no household has a significant impact ____ the market, and so the actions ____ any single household is its best effort to react ____ the market price and the goods available.

7.The correlation ____ price and how much ____ a good or service is supplied ____ the market is known as the supply relationship.

8.____ other words, the higher the price, the lower the quantity demanded.

9.Buyers want to buy ____ many goods ____ possible, ___ cheaply ___ possible.

10.When supply and demand are equal, the economy is said to be ___ equilibrium.

Ex.8. Choose and combine two parts logically to make complete sentences.

Ex.9. Read the text and choose the best option.

The supply/demand theory (1) ________ the paradox of inessential-but- expensive diamonds and cheap-but-essential water. The supply-and-demand theory tells us that diamonds are highly priced because they are (2) ________.

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There are objectively (3) ________of them relative to demand. If diamonds were as (4) _______ as gravel we would use them to pave our garden walks. More precisely, the (5) ________ point in the market for diamonds is reached at a high price per ounce. Recall that at the equilibrium point the supply and demand curves the paradox the quantity demanded (6) ________ the quantity supplied. Diamonds become more (7) ________ to produce as more are produced. Consequently, the supply curve slopes up: producers want a higher price (to cover their (8) ________ cost) if they have to produce more. The price is in equilibrium determined at the (9) ________ of supply and demand. Given the unique supply/demand circumstances in this market (people badly want diamonds and diamonds are costly to produce) the intersection (10) ________ at a high price. If the demand curve were to fall back towards the origin, the price would fall.

Ex.10. Look through the text again and replace the words /phrases in italics with similar ones.

1.Society needs to make choice what should be produced, how it will be produced, and who is allowed to buythose products.

2.The market answers these questions by means of supply and demand.

3.In microeconomics, demand refers to the way in which groups of people living together buy goods.

4.Each household or asmall organization is influenced by different factors.

5.Consumer preferences influence a household’s buying decision to a greatextent.

6.All buyers want to make the best use of the usefulness of a product.

7.Supply and demand is the chief support of the system of market economy.

8.The relationship between demand and supply is the basis of the forces behind the allocation of resources.

9.People naturally avoid buying a product that will refrain them from buying

something else they value more.

10.Two opposing forces of demand and supply form the market.

Ex.11. Translate into English:

1.Суспільствуслідробитивибірщодо того, щовиробляти, як слід виробляти товари та послуги, та хто може споживати ці товари та послуги.

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2.Преференції споживача дуже впливають на купівельне рішення сім’ї.

3.Попит та пропозиція завжди рівносильні, оскільки кількість куплених товарів дорівнює кількості проданих товарів.

4.Фірми працюють незалежно одна від одної, вирішуючи, що продавати та скільки продавати, залежно від ціни.

5.Саме сукупні сили попиту та пропозиції створюють ринкову економіку.

6.Попит та пропозиція є, можливо, однією з найголовніших концепцій економіки та основою ринкової економіки.

7.Ціна є відображенням попиту та пропозиції.

8.Кажуть,що ринкова рівновага настає, коли попит та пропозиція є рівними.

9.Продукти першої необхідності менш вразливі до ціни, тому що споживачі

будуть продовжувати купувати їх незважаючи на зростання ціни. 10.Еластичність відрізняється серед різних продуктів, оскільки деякі

продукти можуть бути більш важливими для споживача.

LANGUAGE SKILLS

Ex.12. Ask questions to which the following statements may be answers.

1.The market (everyone, producers and consumers together) determines the price of a product.

2.Demand is comprised of three things: desire, ability to pay and willingness to pay.

3.Another factor that affects such decisions is income.

4.Economists refer to the behaviour of sellers as the market force of supply.

5.Demand refers to how much (quantity) of a product or service is desired by buyers.

6.In market economy theories, demand and supply theory will allocate resources in the most efficient way possible.

7.Because supply and demand can shift and change, equilibrium in a standard market is also fluid.

8.Producers supply more at a higher price because selling a higher quantity at a higher price increases revenue.

9.When supply and demand are equal, the economy is said to be at equilibrium.

10.A good or service is considered to be highly elastic if a slight change in price leads to a sharp change in the quantity demanded or supplied.

Ex.13. Answer the questions:

1.What kind of choices does every society need to make?

2.What defines the price of a product under condition of competition?

3.Prove that the terms demand and supply not always mean the amount of goods actually sold or bought.

4.What do micro economists usually try to explain?

5.What is demand comprised of?

6.When is demand real?

7.Explain the termutility.

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8.What is demand?

9.What is supply?

10.What does the Law of Demand state?

11.What does the Law of Supply state ?

12.How do supply and demand shape the market? 13.When is the economy said to be at equilibrium? 14.Does equilibrium exist in the real market place?

15.What concept helps to understand supply and demand theory?

Ex.14. Make a presentation of the topic.

WRITING

Ex.15. Make up a plan for a summary of text A.

Ex.16. Using your plan as a base write a brief summary (25-30 sentences) of the text.

Ex.17. Using the information from the text, write an essay on one of the following topics:

a)An increase in demand raises the price of a particular good. An increase in price cuts demand for that good.

b)How does a rational consumer allocate a fixed income between the purchase of two commodities? Would the consumer always use an increase in income to buy more of both goods?

DISCUSSION POINTS

Ex.18. With your group mates do the following.

1.Analyze the effect, in the short run only, on the price of coffee of (i) a severe frost; (ii) a fall in the rate of VAT; (iii) the introduction of rationing.

You are not expected to have a detailed knowledge of the coffee industry.

Apply your understanding of general supply and demand analysis.

Make assumptions about the price elasticity of supply and demand for coffee

and then draw flat or steep curves to match.

2.Explain why the prices of some commodities fluctuate more than those of others.

Explain why unstable conditions of supply and demand result in price changes.

Explain why price inelasticity amplifies the effect on price of changes in supply and demand.

Make use of graphs and relevant examples.

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Ex.19. Explain the following sayings in your own words. What other sayings on the topic do you know?

1.Supply always comes on the heels of demand. Robert Collier, American motivational author, (1885-1950)

2.As scarce as truth is, the supply has always been in excess of the demand.Josh Billings, American humorist (Henry Wheeler Shaw) (1818 – 1885).

3.As the economy grows, so will the demand for energy.Cliff Stearns, the U.S. Representative for Florida's 6th congressional district, (1941)

4.A variety of factors contribute to the price of gasoline in the United States. These factors include worldwide supply, demand and competition for crude oil, taxes, regional differences in access to gasoline supplies and environmental regulations.Gary Miller, the U.S. Representative for California's 42nd congressional district, (1948)

5.It's the law of supply and demand. Demand is down, supply is up, so the price is down. Andrew Harrington, Economist,Australia&New Zealand Banking Group Ltd

TEXT B. THE ROLE OF PRICES

Ex.20. Scan the text below. What main factors does it mention to support the keynote, i.e. the role of prices?

Prices are key ingredients in our economy because they make things happen. If buyers want to own some items badly enough, they will pay more for them. (0) ________ Prices play such an important role in economic life that the United States is often described as a price-directed market economy. Let us see why.

1.Act as Signals to Buyers and Sellers. One of the things that prices do is carry information to buyers and sellers. (1) ________When prices are high enough, they send a "sell" signal to sellers (retailers), who can now earn a profit at the new price.

2.Encourage Efficient Production. Prices encourage business people to produce their goods at the lowest possible cost. (2) ________

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Firms that are efficient will produce more goods with fewer raw materials than firms that are inefficient. (3) ________ While these efforts are in the best interests of the sellers, all of us may benefit because we are provided with the things we want at lower costs.

3. Determine Who Will Receive the Things Produced. Finally, prices help to determine who will receive the economy's output of goods and services. The price that a worker receives for doing a job is called a wage. (4) ________What the worker can buy with those wages will depend, in turn, upon the prices of the goods and services the worker would like to own.

Let’s look at some examples. The most obvious cost a person bears in buying a product is the price of the product. Price reflects cost because people have a limited amount of funds that they can spend, and if they spend their money on one thing, they cannot spend it on another. (5) ________As a result, we expect people to buy more hamburger if the price is $1.00 per pound than if it is $2.00 per pound.

The amount of income a person receives affects the cost of buying an item because it determines which options a person must give up when buying a product. If a person with a low income spends $5000 for a trip around the world, he will have to cut back on food, clothing, or shelter. (6) ________

Increases in people's incomes raise consumption of most products. These products are called normal goods. There are some products, however, that people use less of as their income increases; these products are called inferior goods. Public transportation is an example - as people's incomes rise, they stop riding the bus and drive their own cars. (7) ________ It was because they were a symbol of "working-class" clothes that they were adopted by the radical left in the 1960s, and from there they moved into high fashion.

Prices of related goods also influence how much of a product people buy. Goods that are substitutes satisfy the same set of goals or preferences. An example of a substitute for hamburger is pork. (8) ________ The opposite of a substitute is a complement, a good that helps complete another in some way. Catsup and hamburger buns are complements to hamburger, and if they are priced low enough, consumption of hamburger may rise. Sometimes goods are such good complements that they are sold together and we think of them as a single item. (9) ________

There are other factors that influence the amount of a particular product that people are willing to buy, such as the number of consumers in the market and their expectations about future prices, incomes, and quality changes. To get a complete list for any product might be time consuming and difficult, but it is not necessary because we want to focus on the relationship between price and the quantity of a product that people are willing to buy during some interval of time. (10) ________

Ex.21. Read the text. Choose the best sentence A-J to fill each of the gaps 1- 10. Do not use any letter more than once. There is an example at the beginning.

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