1.5.4 Text for discussion.

a. Look up the dictionary for the meaning and pronunciation of the following words and word-combinations and use them to discuss the problems outlined in the text.

A significant fault, intermediate, at one extreme… at the other extreme, individuals and businesses, exercise freedom of choice, government restrictions, in response to the demand, to avoid the disadvantages, enjoying the benefits, the private sector, the public sector, share of the output, taxation, transfer payments, healthcare, education, policing, defence.

b. Briefly scan the text and outline the list of major points.

c. Read the text more carefully and comment on the following items:

-The extremes of command and market economies.

-The common features of all economies in the world.

-The aim of mixed economies.

-The ways governments intervene in their economies.

Mixed Economies

Command and market economies both have significant faults. An intermediate system has developed, known as mixed economies.

A mixed economy contains elements of both market and planned economies. At one extreme we have a command economy which does not allow individuals to make economic decisions. At the other extreme we have a free market where individuals and businesses exercise considerable economic freedom of choice without any government restrictions. Between these two extremes lies a mixed economy. In mixed economies some resources are controlled by the government while others are used in response to the demand of the consumers.

Technically, all economies of the world are mixed. Some countries are nearer to command economies, while others are closer to free market economies. The aim of mixed economies is to avoid the disadvantages of both systems while enjoying the benefits that they both offer. So, in a mixed economy the government and the private sector interact in solving economic problems. The state controls the share of the output through taxation and transfer payments and intervenes to supply essential items such as healthcare, education, policing, and defence, while private firms produce cars, furniture, electronic items, etc.

1.6 Render the passage in English using the English equivalents of the italicized phrases given in Russian. Express the main idea of the passage in one sentence or entitle it.

Если хозяйство плановое, то работа промышленности (manufacturing) подчиняется (is subject to) плану, в котором государство определяет задачи (sets the objectives) и планирует развитие на 5 лет вперед (five years ahead). В плановой экономике покупатели лишены возможности (are not allowed ) влиять на (to influence) производство товаров. Поскольку значительная доля полученной прибыли (profit earned) должна быть выплачена государству, то в условиях плановой экономики стимулы (incentives) работать эффективно невелики. Промышленность часто выпускает непривлекательные и старомодные (unattractive and old-fashioned) товары, поскольку невозможно предсказать (it is impossible to predict) изменения моды на 5 лет вперед. Государство в условиях плановой экономики может гарантировать (guarantee) своим гражданам (citizens) образование и медицинское обслуживание.

Unit 1 Glossary

ADVERTISING: Information provided about a product by a company to promote or maintain sales, revenue, and or profit. Advertising is often an explicit method of signaling that sellers use to provide information to buyers. The primary objective of advertising from the sellers perspective is to increase (or at least maintain) demand for a product.

ALLOCATION: The process of distributing resources for the production of goods and services, and of distributing goods and services for consumption by households. This process of allocation is essential to an economy's effort to address the problem of scarcity.

ASSUMPTION: An initial condition or statement that sets the stage for an analysis by abstracting from the real world. Assumptions are important to economic theories and economic analysis.

BUSINESS: A profit-motivated organization that combines resources for the production and supply of goods and services. The term business is often used synonymously with the term firm..

CAPITAL GOOD: A good that is a manufactured (or previously produced) factor of production that is used to manufacture or produce other things. Common examples of capital goods are factories, buildings, trucks, tools, machinery, and equipment used by businesses in their productive pursuits. The acquisition of capital goods is the primary goal of business investment.

CENTRAL PLANNING: A system of extensive central government control of an economy, including organizing production and making allocation decisions. This was the popular method of allocating resources and answering the three basic questions of allocation under the communism/socialism economic systems of the Soviet Union, China, and others during the 1950s, 1960s, and 1970s.

CONSUMER GOODS Products that are purchased for consumption by the average consumer. Alternatively called final goods, consumer goods are the end result of production and manufacturing and are what a consumer will see on the store shelf. 

COMMAND ECONOMY: An economy in which the government uses command and control to answer the three questions of allocation. The two most notable command economies of the 20th century were the communist/socialist economic systems of China and the Soviet Union.

COMMODITY A basic good used in commerce that is interchangeable with other commodities of the same type. Commodities are most often used as inputs in the production of other goods or services. The quality of a given commodity may differ slightly, but it is essentially uniform across producers. When they are traded on an exchange, commodities must also meet specified minimum standards, also known as a basis grade. 

COMPETITION: In general, the actions of two or more rivals in pursuit of the same objective. In the context of markets, the specific objective is either selling goods to buyers or alternatively buying goods from sellers.

CONSUMER: A broad term for people when they are engaged in the use of goods and services to satisfy wants and needs. Consumers are part of the household sector.

CONSUMPTION EXPENDITURE: The common term for an expenditure by the household sector on gross domestic product.

CONSUMPTION: The use of resources, goods, or services to satisfy wants and needs.

DEMAND: The willingness and ability to buy a range of quantities of a good at a range of prices, during a given time period. Demand is one half of the market exchange process; the other is supply.

ECONOMY: The system of production, distribution, and consumption of goods and services that a society uses to address the problem of scarcity.

ECONOMIST: A individual who has received extensive training in economic theories, applications, and analysis and whose primary employment involves the research, teaching, consulting, and other applications of this economic training.

ECONOMIC: Relating to economics or the study of the economy. This word is commonly added to other terms to emphasize its importance to economics.

ECONOMICS: A social science that studies the allocation of limited resources to the production of goods and services used to satisfy consumer's unlimited wants and needs.

ECONOMIC SYSTEM: The assorted institutions that society uses to answer the three basic questions of allocation and address the fundamental problem of scarcity. Another, more popular term for economic system is economy. An economy, or economic system, is the structural framework in which households, businesses, and governments undertake the production and consumption decisions that allocate limited resources to satisfy unlimited wants and needs.

ECONOMIC FORCES: Forces in the marketing environment that include decisions made by consumers and business organizations.

ENVIRONMENT: All of the naturally occurring stuff that came with the planet, before it's been altered, extracted, transformed, or used up for production. It includes the air, water, land, vegetation, and wildlife.

FACTORS OF PRODUCTION: The four basic factors used to produce goods and services in the economy--labor, capital, land, and entrepreneurship.

FOR WHOM?: One of three basic questions of allocation (What? and How? are the other two). Answering the "For Whom?" question of allocation determines who receives the goods that society produces with limited resources.

GOODS: When used without an adjective modifier (like "final" goods or "intermediate" goods), this generically means physical, tangible products used to satisfy people's wants and needs. This term ‘good’ should be contrasted with the term services, which captures the intangible satisfaction of wants and needs.

GOVERNMENT SECTOR: The basic macroeconomic sector that includes all levels of government, including federal, state, and local. The primary function of the government sector is to force resource allocation decisions that might not otherwise be made by the rest of the economy. This is one of four macroeconomic sectors. The other three are household sector, business sector, and foreign sector.

GOVERNMENT: A political body exercising control and authority over a group of individuals. Governments allocate resources based on laws and the command of the government.

INDUSTRY: A group of firms producing goods or services that are close substitutes-in-consumption. The similarity of the products makes it possible to analyze the production in a market framework.

MACROECONOMICS: The branch of economics that studies the entire economy, especially such topics as aggregate production, unemployment, inflation, and business cycles. It can be thought of as the study of the economic forest, as compared to microeconomics, which is study of the economic trees.

MARKET DEMAND: The total demand of each individual willing and able to buy a good. Market demand is found by combining the individual demands of everyone willing and able to buy a particular good.

MARKET-ORIENTED ECONOMY: A mixed economy that relies heavily on markets to answer the three basic questions of allocation, but with a modest amount of government involvement. While it is commonly termed capitalism, market-oriented economy is much more descriptive of how the economy is structure.

MARKET: The organized exchange of commodities (goods, services, or resources) between buyers and sellers within a specific geographic area and during a given period of time. Markets are the exchange between buyers who want a good--the demand-side of the market--and the sellers who have it--the supply--side of the market. In essence, a buyer gives up money and gets a good, while a seller gives up a good and gets money.

MICROECONOMICS: The branch of economics that studies the parts of the economy, especially such topics as markets, prices, industries, demand, and supply. It can be thought of as the study of the economic trees, as compared to macroeconomics, which is study of the entire economic forest.

MIXED ECONOMY: An economy, or economic system, that relies on both markets and governments to allocate resources. While, in theory, we could have a pure market economy or a pure command economy, in the real world all economies are mixed, relying on both markets and governments for allocation decisions.

NEED: This is often thought of as a physiological or biological requirement for maintaining life, such as the need for air, water, food, shelter, and sleep. Satisfaction is achieved by fulfilling needs. Physiological needs should be contrasted with psychological wants that make life more enjoyable but are not necessary to stay alive.

NET SALES  The amount of sales generated by a company after the deduction of returns, allowances for damaged or missing goods and any discounts allowed. The sales number reported on a company's financial statements is a net sales number, reflecting these deductions.

PLANNED ECONOMY: An economy, or economic system, that relies heavily on central planning by government to allocate resources and answers the three basic questions of allocation. This is also commonly termed a command economy. A planned economy should be contrasted with a market-oriented economy, or capitalism.

PROFIT: A financial benefit that is realized when the amount of revenue gained from a business activity exceeds the expenses, costs and taxes needed to sustain the activity. Any profit that is gained goes to the business's owners, who may or may not decide to spend it on the business.   PUBLIC SECTOR: A term for government, which for the United States includes all three levels--federal, state, and local. The term public sector is most useful as a contrast to the term private sector, which includes households and businesses.

PURE COMMAND ECONOMY: An economy in which the government makes all allocation decisions and answers all three questions of allocation. There are no markets. Government does it all. This is a theoretical ideal or extreme that does not actually exist in the real world. As a theoretical ideal, though, it does provide a benchmark that can be used for comparison with real world economic systems.

PURE MARKET ECONOMY: An economy in which markets answer all allocation decisions and answer all three questions of allocation. There is no government. Markets do it all. This is a theoretical ideal or extreme that does not exist in the real world. As a theoretical ideal, though, it does provide a benchmark that can be used for comparison with real world economic system.

RAW MATERIALS: The stuff used in the production of tangible products that become the tangible products.

RECESSION: The common term used for the contraction phase of the business cycle. A general period of declining economic activity. Inflation tends to be low or non-existent during a recession. Recessions last anywhere from six to eighteen months, with one year being common.

RESOURCE ALLOCATION: The process of dividing up and distributing available, limited resources to competing, alternative uses that satisfy unlimited wants and needs.

RESOURCE: The labor, capital, land, and entrepreneurship used by society to produce consumer satisfying goods and services.

REVENUE The amount of money that a company actually receives during a specific period, including discounts and deductions for returned merchandise. It is the "top line" or "gross income" figure from which costs are subtracted to determine net income. Revenue is calculated by multiplying the price at which goods or services are sold by the number of units or amount sold.

SCARCITY: A pervasive condition of human existence that exists because society has unlimited wants and needs, but limited resources used for their satisfaction. In other words, this scarcity problem means: (1) that there's never enough resources to produce everything that everyone would like produced; (2) that some people will have to do without some of the stuff that they want or need; (3) that doing one thing, producing one good, performing one activity, forces society to give up something else; and (4) that the same resources can not be used to produce two different goods at the same time. We live in a big, bad world of scarcity. This big, bad world of scarcity is what the study of economics is all about.

SERVICE: An activity that provides direct satisfaction of wants and needs without the production of a tangible product or good. Examples include information, entertainment, and education. This term service should be contrasted with the term good, which involves the satisfaction of wants and needs with tangible items.

SPENDING The amount of money spent by households in an economy. The spending includes durables, such as washing machines, and nondurables, such as food. It is also known as consumption, and is measured monthly. John Maynard Keynes considered consumer spending to be the most important determinant of short-term demand in an economy.

STANDARD OF LIVING: In principle, an economy's ability to produce the goods and services that consumers use to satisfy their wants and needs. In practice, it is the average real gross domestic product per person--usually given the name per capita real GDP.

SUBSIDY: A payment from government to individuals or businesses without any expectations of production. Government extends subsidies for many different reasons. They go to students, unemployed workers, the poor, farmers, wealthy friends of political leaders, businesses trying to fend off foreign competitors, and the list could go on.

SUPPLY: The willingness and ability to sell a range of quantities of a good at a range of prices, during a given time period. Supply is one half of the market exchange process; the other is demand.

SURPLUS: A condition in the market in which the quantity supplied is greater than the quantity demanded at the existing price.

WANT: This is often thought of as a psychological desire which makes life just a little more enjoyable, but which is not physiological necessary to life.

WANTS AND NEEDS: These are the unfulfilled desires that motivate human behavior and that when satisfied improve human well-being. They include both physiological or biological requirements for maintaining life (needs) and the psychological desires which make life more enjoyable (wants).