II. For each question 1-4, mark one for the answer you choose.

1. Perfect competition is a market structure

A. where each firm produces a differentiated product.

B. where there is freedom of entry to the industry.

C. in which there are a few firms.

2. Monopoly is a market structure

A. where a unique product is produced.

B. where the firm is a price taker.

C. where there are no restrictions to the entry of new firms.

3. Monopolistic competition is a market structure

A. where there are a few firms.

B. where each firm produces a homogeneous product.

C. where each firm has some control over its price.

4. Oligopoly is a market structure

A. where there are a lot of firms.

B. where there are no barriers to the entry of new firms.

C. where firms produce either an undifferentiated product or a differentiated one.

Free-market medicine in russia

Is the Patient Recovering?

I. Read the text. Some parts of the text have been taken out. These extracts are listed below. Complete each gap with the appropriate extract. One sentence does not belong in any of the gaps.

a) No longer will the state guarantee employment and a moderate standard of living for all.

b) Many commentators began to wonder whether the economy could escape the slide into “hyperinflation” when money would become virtually worthless.

c) With the virtual abandonment of price controls, prices soared and by the end of 1992 inflation had reached a massive 1354 per cent.

d) Consumer choice decreased, too.

e) Such an impressive reduction in inflation was due largely to government successfully capping its spending.

1. Reforming the old Soviet Union was never going to be easy. To replace central planning with free-markets and enterprise would involve a radical transformation of economic life. But following the rise to power of Boris Yeltsin in Russia in 1991, this is just what was attempted. The following policies were adopted in early 1992:

– Price controls on 90 per cent of items were abolished. But with shortages of most goods, it was hardly surprising that prices rose dramatically.

– Business was given easier access to foreign exchange, and foreign companies were encouraged to invest in Russia.

– The largest privatisation programme in the world was launched. In many of the new private companies, workers were to become the principal shareholders.

These reforms represented a massive shock to the old system. ___ (1) These huge price increases led to falling demand, but the disruption to the economy also led to falling supply. In 1992 output fell by nearly 20 per cent and the purchasing power of wages fell by 40 per cent.

2. The government’s budget deficit (the excess of government spending over government tax receipts) rose from 1.5 per cent of national income in the first quarter of 1992 to 15 per cent by the final quarter. Perhaps most significantly, the money supply rose nearly 600 per cent between January and October. ___ (2)

3. Critics argued that the costs of reform were intolerably high. The Russian economy, inherently weak and resistant to change, was unprepared for the radical nature of the policy and as such the reform programme could not be sustained. They highlighted the following weaknesses inherited from the old system:

– Many Russian companies are virtual monopoly producers. If they run into trouble, as many have done, this leads to huge shortages throughout the economy.

– Industry, being used to taking orders from above, has been slow to adapt to economic change and the rigours of the marketplace. Much of it is highly inefficient and wasteful, making a poor use of very scarce resources. Estimates suggest that in 1992 Russia used 15 times as much steel and 6 times as much energy as the USA per unit of national output.

– With the freeing of prices, many firms in a monopoly position simply raised prices and reduced output. That way they could increase profits but with less effort.

Supporters of reform recognised these weaknesses, but maintained that they only strengthened the arguments for changing the old system. In addition, they argued that the reform package of 1991/2 did not go far enough. Price controls on certain goods remained. Price markups in state shops were limited to 25 per cent, oil prices were controlled and imports were subject to a 20 per cent tariff (customs duty).

4. Some supporters of reform argued that an economic slump was the medicine required to drive the old sickness out of the system. It would force inefficient producers out of the market, and the competition for survival would lead to greater productivity and ultimately to long-term prosperity.

5. Four years on, it appeared that the supporters of reform may have been right in their judgements. The Russian economy seemed to have turned the corner. By mid-1996, annual inflation had fallen to 80 per cent. ___ (3) The government’s budget deficit was now well within the limits agreed with the International Monetary Fund. The rouble, after a disastrous collapse in 1994, seemed to have stabilised on the foreign exchange market. Output, however, was still falling. In 1995 output fell by 4 per cent. Nevertheless forecasters were predicting growth of upwards of 4 per cent for 1997 onwards.

6. Critics of reform, even in the light of such real gains, still point to the hardship experienced by many Russians. Official unemployment stands at around 8 per cent, with an estimated additional 6 per cent hidden unemployment. In a fifth of all Russian regions, unemployment is over 30 per cent, and in a few over 50 per cent. Those in work have not fared much better. The average real wage fell by some 37 per cent between 1994 and 1996. Many Russians today are faced with severe hardship.

7. Some, the “New Russians”, have become very wealthy-some legitimately, but some through criminal activities (the rise of the Russian Mafia has been a disturbing development). The rise of the wealthy further serves to highlight the growing divide between rich and poor.

8. The old certainties have gone. ___ (4) Today’s market system in Russia is one where the strong gain and the weak lose.