15 Inflation

Prices of nearly all goods and services have moved in recent history. Inflation is the process of raising prices or, what is the same thing – a fall in the value of money.

At the beginning a rising price level may not be considered dangerous. The problem, however, is that when the rise in prices starts, it is difficult to stop it. Gradually the rate of inflation increases, it may lead to hyperinflation.

Inflation reduces the standard of living of people dependent on fixed incomes, as pensioners. Not all the prices are rising. Even during rather rapid inflation some prices may be constant and others even fall.

Inflation may occur for many different reasons. Traditionally changes in the price level have been explained by an excess of total demand. The essence of this kind of inflation may be explained in the phrase “too much money chasing too few goods”.

In this case we see long queues of shoppers to make purchases. Stocks of goods available are less than the quantity of goods that the consumers are willing to buy. Besides there are some black markets in which people buy things at prices much higher than they should be.

There are other reasons causing inflation. There were some periods in our recent economic history when the price level rose despite low demand. Sometimes the cost of goods rises and this results in the rise of prices, or inflation. In this case the cost makes the price level higher.

Inflation can create serious difficulties for a country dependent on international trade, as Britain has discovered over the past thirty years. When the level of internal prices rises in comparison with prices of foreign traders, imports increase. Moreover, exports are discouraged.

Thus, it is important that the control of inflation should be given priority in government policy. (1500)

16 Types of Business Firms

Microeconomics studies particular firms, banks, enterprises etc. Business organizations may be considered as firms or companies. They produce goods or render services. They also rent or purchase buildings, land, equipment. They market and advertise their products. They deal with government and courts, as well as with banks, insurance companies.

From the legal point of view there are three basic kinds of business firms: 1) proprietorships, 2) partnerships and 3) corporations. A proprietorship is simply a one-owner firm. The proprietor is responsible for all personnel and business debts and losses. He provides the capital and executes the total management. To start the business of this kind it is necessary to obtain licenses required by the law.

The proprietorship form has several advantages, such as: simplicity of organization, freedom to make all decisions, tax advantages etc. Among disadvantages the following are worth mentioning: possible lack of ability and experience, difficulty in raising capital.

Partnerships are firms owned jointly by two or more people who are co-owners of business. Partnerships are based on agreement, which should cover all areas of possible disagreement among the partners. Advantages of the partnership may be combined talents, judgements, skills as well as larger capital and tax advantages. Disadvantages of this form are divided authority, danger of disagreement etc.

Corporation is a firm owned by a group of people, called stockholders, and given rights, privileges and liabilities by law. Advantages of the corporation is variety of skills, abilities and ideas, ease of expansion. Disadvantages of this form of ownership may be as follows: government regulation, profit sharing, taxes.

(1500)