V. Answer the following questions:

1. Prices are fixed in most economic systems, but what is possible in some systems? 2. What is the individual generally unable to change? 3. Under what conditions will a consumer go on buying a commodity? 4. What does the consumer show by buying more bananas? 5. What happens with each successive purchase? 6. At what point will the consumer stop buying the commodity at the current price? 7. What remains unchanged with each purchase? 8. What has changed when this point is reached? 9. Under what conditions might he have bought more? 10. What does a consumer’s desire tend to do?

Text C

In economics, the term «price» denotes the consideration in cash (or in kind) for the transfer of something valuable, such as goods, services, currencies, securities, the use of money or property for a limited period of time, etc. In commercial practice, however, it is normally restricted to the amount of money payable for goods, services, and securities. In other applications, the word «rate» is preferred. Interest rate¹ is the price for temporary use of somebody else’s money, exchange rate² is the price of one currency in terms of another.

Price may refer either to one unit of a commodity (unit price) or to the amount of money payable for a specified number of units or for something where units are not applicable, e.g., for five tons of coal (total price) or for a specific painting by Rembrandt.

Prices perform two important economic functions: they ration scarce resources, and they motivate production. As a general rule, the more scarce something is, the higher its price will be, and the fewer people will want to buy it. Economists describe that as the rationing effect of prices. In other words, since there is not enough of everything to go around, in a market system goods and services are allocated, or distributed, based on their price.

Price increases and decreases also send messages to suppliers and potential suppliers of goods and services. As prices rise, the increase serves to attract additional producers. Similarly, price decreases drive producers out³ of the market. In this way prices encourage producers to increase or decrease their level of output⁴. Economists refer to this as the production-motivating function of prices.

Prices may be either free to respond to changes in supply and demand or controlled by the government or some other (usually large) organisation.

VII. Answer the following questions:

1. What does the term «price» denote in economics? 2. How is the price normally restricted in commercial practice? 3. What is interest rate? 4. What is exchange rate? 5. What may the price refer to? 6. What two important functions do prices perform? 7. What can you say about the rationing effect of prices? 8. What do you know about the production-motivating function of prices? 9. May prices be free to respond to changes in supply and demand?

U N I T 15

MONEY and FINANCIAL INSTITUTIONS

Text A

Basically, money is what money does. This means that money can be any substance¹ that functions as a Medium of Exchange, a Measure of Value, and a Store of Value.

As a medium of exchange, money is something generally accepted as² payment³ for goods and services

As a measure of value, money expresses worth in terms that most individuals understand.

Money also serves as a store of value. This means goods or services can be converted into⁴ money that is easily stored until some future time.

The different forms of money are in use in the United States today. The most familiar are coin and currency. The term coin refers to metallic forms of money. The term currency refers to paper money issued by government. While money has changed in shape, kind or size over the years, modern money still shares many of the same characteristics of primitive money. Modern money is very portable⁵ when people carry checkbooks. For example, they really are carrying very large sums of money since checks can be written in almost any amount.

Modern money is very durable⁶. Metallic coins last a long time under normal use⁷ and generally do not go out of circulation⁸ unless they are lost. Paper currency also is reasonably durable. Modern money also rates high in divisibility⁹. The penny which is the smallest denomination of coin¹⁰, is more than small enough, for almost any purchase. In addition, checks almost always can be written for the exact amount. Modern money, however, is not as stable in value. The fact, that the money supply¹¹ often grew at a rate 10 to 12 per cent a year was considered as major cause of inflation.