Text II

A price is the amount paid for a specified quantity and quality of any good or service. While economists admire competitive pricing, the participants do not. Sellers usually regard the market price as too low, while buyers denounce it as too high. Those who consider the market price unfair often appeal to government to peg it at a higher or lower level. This is usually not a good idea.

To ask whether a price is fair or unfair is to ask the wrong question. Rather, we should view price as the basic control mechanism in a market economy. Prices in the broad sense, including wage rates, and interest rates, perform three main functions: They provide an incentive to production, a means of rationing scarce supplies, and a signaling mechanism indicating the need to transfer resources from one use to another.

The incentive function is obvious. People work to earn a wage or salary and save in order to get interest or dividends. Companies produce a product because its price is high enough to cover costs. No one has to be told what to do. Their response to the prices they see before them is sufficient to keep the economic machine in motion.

The rationing function require a little more thought. There is only a certain amount of gasoline available this month for automobile drivers. Who is to get it? And how much will each get? A government agency could issue ration tickets. Or people could simply line up at the pumps – first come, first served. But there is another way: Set a market price high enough so that the amount consumers want to buy at that price just equals the available supply. In a purely competitive market the price will settle at this equilibrium level, and it will ration supplies among consumers automatically. This is an enormous convenience in a world where people would like more of almost everything if they could obtain goods for free.

A final function of price, or more correctly of a change in price, is to serve as a signaling mechanism, indicating the need for resource transfers from one line of production to another. If the price of soybeans rises relative to the price of corn, this tells us that some farm acreage should be shifted to soybeans, and it will also induce farmers to make the shift. If the wage of oil- well drillers rises relative to other wages, this signals that more workers should be transferred to oil drilling, and the wage increase itself will lead more people to apply for this kind of work.

If resource transfers are not brought about through free movement of prices, they have to be made through administrative orders. This is the main method used in centrally planned economies, but it is a clumsy method, subject to delay and errors. A price-directed economy is quicker on its feet, leading to faster adjustment of resource use to changing demands.

What happens if government intervenes to fix a price above or below its equilibrium level? Under competitive conditions, the equilibrium price in this market will be P. But sellers would like to get more, and they mobilize political pressure on government to set a higher price, P₁. What will happen? The amount sellers would like to produce and sell at this price is larger than the amount buyers are willing to buy. There is a surplus of the good. Price can no longer serve its function of restraining quantity supplied to equal quantity demanded. What will happen to the surplus has to be decided in some other way. (Note: Surplus is a situation in which the price is being held above equilibrium).

Consider the opposite case, in which buyers get the upper hand and persuade government to set a price below equilibrium, say, at P₂. At this price, the quantity buyers would like to get is larger than the quantity sellers are willing to supply. This is a shortage of the good. Price can no longer serve its function of restraining quantity demanded to equ­al quantity supplied. The question of who will get how much of the scarce supply must be decided in some other way (Note: Shortage is a situa­tion in which price is being held below equilibrium).

What determines the price and output of each good in the economy? What determines the allocation of productive resources among various products? To answer such questions we must usually look beyond a single company to a group of companies producing the same or similar products. Such a group is called an industry. Thus we speak of the steel industry, or the shoe industry, or, more generally, of industrial economics.

A basic fact of life is that industries differ widely in their market structure - how many sellers there are, how many buyers there are, whether different sellers’ products are identical and so on. Why is market structure important? Because to large extent it shapes market conduct. A company that has a monopoly behaves differently from one faced with several rival producers. A company selling a branded, advertised product behaves differently from one selling a completely standardized product.

Market conduct, in turn, effects the economic performance of an indu­stry: how prices are determined, whether costs are as low as they could be and whether profits are low or high. So, in analyzing an industry, we view the casual chain: market structure - market conduct – economic performance.

Market price itself is not controlled by anyone, and over the long run it just covers cost of production by a producer of average efficiency.

Task 1. Find the correct translation of the following words and word combinations:

A. 1. amount 2. to obtain goods for free 3. market price 4. competitive pricing 5. to induce 6. relative to 7. wage rate 8. interest rate 9. an incentive to production 10. to get interest 11. competitive maker 12. clumsy method 13. to fix a price 14. under competitive conditions 15. pressure on government 16. to set a price 17. a surplus of the good 18. to persuade government 19. a shortage 20. to determine 21. allocation 22. similar products 23. to a large extend 24. market conduct 25. to behave 26. rival producer 27. advertised product 28. economic performance 29. causal chain 30. average efficiency.

В. 1. последовательная (причинно-следственная) цепочка 2. грубый (неуклюжий) 3. установить цену (2 выражения) 4. получить товары бесплатно 5. похожие продукты 6. при конкурентных условиях 7. количество 8. разрекламированный продукт 9. получить процент 10. конкурентное ценообразование 11. давление на правительство 12. конкурентоспособный изготовитель 13. рыночная цена 14. средняя производительность 15. конкурирующий производитель 16. относительно 17. излишек товара 18. побуждать, стимулировать 19. стимул к производству 20. вести себя 21. ставка заработной платы 22. размещение 23. рыночное поведение 24. экономический показатель деятельности 25. определить 26. процентная ставка 27. дефицит 28. в значительной степени 29. убеждать правительство.

Task 2. Ask each other questions on the contents of the text and answer them.

MARKETS AND PRICES