10.Why does the government prompt people to register as if they were a part of the labour force?

11.In what way does the government provide an incentive not to work (while work places are available)?

12.What other factors, not connected with government interventions directly, cause unemployment?

Unit 5. MARKET

Text A. Competition

"Competition," wrote Samuel Johnson, "is the act of endeavoring to gain what another endeavors to gain at the same time." We are all familiar with competition — from childhood games, from sporting contests, from trying to be promoted in our jobs. But our familiarity does not tell us how vitally important competition is to the study of economic life. Competition for scarce resources is the most important concept around which all modern economics is built. Prices, wages, methods of production, which products are produced and in what quantities, the size and organization of business firms, the distribution of resources, and people's incomes all result from competitive processes.

Let us consider market prices for consumer goods. The baker has on hand a stock of bread, a valuable good for which consumers are willing to compete by offering the baker a price. The baker wants to receive the highest price possible, but he is constrained. If he sets his price too high, customers will not buy all that the baker has to sell. They will buy from another baker, or they will buy pizza or potatoes instead. So the baker sets a price that he thinks will help him sell everything he wants to sell. That price is determined by the willingness of customers to compete for his product, and by the willingness of rivals to compete for his customers.

The market-clearing price represents the lowest price that buyers must pay, and the highest price that sellers can receive, each without being outbid by rivals. This competitive process fixes the prices of goods and services that consumers want.

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Many critics of capitalism and market economies argue that competition is one of the central evils of the system — that the pursuit of higher profits or higher wages pits people against one another, works to reduce cooperation within society, and makes some people better off only at the expense of others. Competition, however, is not the creation or even a by-product of a capitalist or market system. Competition exists everywhere in nature, and in all economic systems.

The difference in social systems is not the presence or absence of competition. Instead, the difference is in the type of competition different systems have. To succeed in some economic systems one must excel in bureaucratic politics, to succeed in other economic systems one must excel in productive efficiency.

Despite its importance to modern economic life, competition is not the solely process in economic activity. The modern market economy is as much a system of cooperation as it is a system of competition. Within the family and within the firm, between the customer and the supplier, we cooperate to achieve our goals. This cooperation is as vital as competition to a productive economy.

The kind of competition matters much more than the amount. Competition that takes the form of violence and crimes destroys wealth; competition that takes the form of trying to be more productive creates wealth.

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1.What is the most important concept around which all modern economics is built?

2.How did Samuel Johnson define competition?

3.What economic processes result from competition?

4.What determines the price of any product?

5.How can you define the market clearing price?

6.Why many critics argue that competition is one of the central evils of the system?

7.Is the presence or absence of competition determined by the type of social system?

8.What is the counter-process of competition vital to a productive economy?

9.Is amount of competition more important than its quality?

10.How competition can destroy wealth?

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Text В. Natural Monopoly

In economics, a natural monopoly is a persistent situation where a single company is the only supplier of a particular kind of product or service due to the fundamental cost structure of the industry. Natural monopolies are often contrasted with coercive monopolies, in which competition would be economically viable if allowed but potential competitors are barred from entering the market by law or by force.

Natural monopolies exist when the largest supplier in an industry, or the first supplier in a local area, has an overwhelming cost advantage over other actual or potential competitors. This takes place in industries where capital costs predominate, creating economies of scale which are large in relation to the size of the market, and hence high barriers to entry. The best examples are water services and electricity. It may also depend on control of a particular natural resource. Companies that grow to take advantage of economies of scale often run into problems of bureaucracy; these factors interact to produce an "ideal" size for a company, at which the company's average cost of production is minimized. If that "ideal" size is large enough to supply the whole market, then that market is a natural monopoly.

All industries have some costs of investment which must be met for firms to enter them. Industries with higher investment costs tend to have less competition (compare airplane manufacture with a lawnmowing service). Some industries have investment costs which are so high that if more than one firm tries to supply the same market, all except one (the one with the deepest pockets) will be driven into bankruptcy, because none will be able to make a profit. Such industries are known as natural monopolies.

Why can only one firm survive in a natural monopoly? Because prices will be driven down to a minimal profit level per customer, covering the daily costs of providing the service (marginal costs) but not the huge initial investment (fixed costs). When a firm has made a large investment it

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is prepared to accept an absolute minimum price from each customer rather than have no income at all; each customer may contribute a little to paying off the investment, but not enough. In this situation, firms will not have the income to service the debts they took on to finance the investment. This will drive all into bankruptcy (or merger), except for the last one left standing, which can then charge a monopoly profit and recoup its investment costs. In essence, a firm must be able to at least charge its average cost to survive in the long run. Because competitive firms must charge marginal cost, they are bound to fail in their attempt to compete, and a monopolist will appear.

Why does this not happen in other industries? It is a combination of very high costs and a standardized product or service (electricity from one company .is no better than electricity from another). A standardized product means competition is very high. In natural monopolies, the product is standard, and the industry's high costs cannot be covered if there is competition. Only a monopolist can charge high enough prices to sustain the industry.

Such a process happened in the water industry in the nineteenth century Britain. Up until the mid-nineteenth century, Parliament did not want municipal involvement in water supply. As a result, in 1851, private companies had 60% of the market. Competition among the companies in larger industrial towns lowered profit margins, as companies were less able to charge a sufficient price for installation of networks in new areas. Such situations resulted in higher costs and lower efficiency. With a limited number of households that could afford their services, expansion of networks slowed, and many companies were not profitable. With a lack of water and sanitation, municipalisation took place after 1860. It was municipalities which were able to raise the finance for investment.

As with all monopolists, a monopolist who has gained his position through natural monopoly effects may start to behave that some may see as the abuse of his market position. This leads to calls from consumers for government regulation.

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VOCABULARY

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