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Chapter 4 markets and equilibrium

1. Key terms – matching and translation.

Read aloud the key term and its definition so that they make up a single sentence. (Remember about the agreement between the subject and the predicate!). Translate the sentences you have arrived at from English into Russian.

1 arbitrage	Government imposed price ceilings or price floors that hinder the market's ability to ration goods efficiently.
2 price controls	Adam Smith's name for automatic market adjustments.
3 externalities	Their incomes depend on cutting transaction costs for others.
4 speculator	Emerge because information and mobility are costly.
5 public goods	Risklessly buying at a low price in one market and then selling at a higher price in another market.
6 price floor	Can be enjoyed by many people simultaneously, but restricting access is prohibitively expensive.
7 price ceiling	Floors that may cause the unskilled to be unemployed.
8 intermediaries	A legal limitation that causes a surplus.
9 invisible hand	A legal limitation that causes a shortage.
10 minimum wage laws	Examples include ticket scalpers.
11 transaction costs	Benefits or costs of an activity spill over to third parties.

2. Text translation.

Translate the text from English into Russian in writing paying particular attention to the translation of the economic terms in bold as well as words and phrases relevant to the subject of the text. Read out your translation in class and introduce the necessary corrections.

Markets and equilibrium

Chapter Objectives

After you have read and studied this chapter you should be able to explain how prices and quantities change to reflect movements in supplies and demands; describe the effects of government price controls (price ceilings and price floors) on the market’s ability to efficiently allocate society’s scarce resources and also show how price controls prohibit a market from achieving an equilibrium price and quantity; list some of the activities performed by speculators, arbitrageurs, and intermediaries in the market place; offer suggestions about how supply and demand interact to shape the activities in markets that you might encounter in the future; state how the market system answers the “what”, “how”, and “for whom” questions; and list the five economic goals for government in a market economy.

Chapter Review: Key Points.

1. Increases in supplies or decreases in demands tend to reduce prices. Decreases in supplies or increases in demands tend to raise prices. Increases in either supplies or demands tend to increase quantities. Decreases in either supplies or demands tend to shrink quantities. If both supply and demand shift, the effects on price and quantity may be either reinforcing or at least partially offsetting. (You need to review this important material if these points make little sense to you.)

2. Transaction costs arise because information and mobility are costly. This allows the price of a good to vary between markets, and to approach its equilibrium erratically.

3. Intermediaries prosper by reducing trans­action costs incurred in getting goods from ultimate producers to ultimate consumers. Speculators facilitate movements towards equilibrium because they increase demand by trying to buy when prices are below equilibrium, and increase supply by selling when prices exceed equilibrium. This dampens price swings and cuts the costs and risks to others of doing business.

4. Arbitrage involves buying where prices are low and selling where prices are higher, If price spreads exceed transaction costs, arbitrage is risklessly profitable. Competition for opportunities to arbitrage dampens profit opportunities and facilitates efficiency by ensuring that price spreads between markets are minimal.

5. Government can set monetary prices at values other than equilibrium price, but price ceilings or price floors do not “freeze” opportunity costs; instead, these price controls create economic inefficiency and either shortages or surpluses, respectively.

6. The market system tailors production according with consumers’ demands in answering the basic economic question of “What?” will be produced. Competition tends to compel efficient forms of production in answering “How?” production will occur. Markets answer the “Who?” question by producing for those who own valuable resources.

7. Where the price system is incapable of providing certain goods or fails to supply the socially optimal levels, government steps in to supplement the private sector in five major ways. It attempts to:

1. provide a legal, social and business environment for stable growth;

2. promote and maintain competitive markets;

3. redistribute income and wealth equitably;

4. alter resource allocations in an efficient manner where public goods or externalities are

present; and

5. stabilize income, employment, and prices.

8. If negative externalities (costs) exist, the private market will provide too much of the product and the market price will be too low because full production costs are not being charged to consumers. If positive externalities (benefits) exist, too little of the product will be produced by the private market and market price will be too high, requiring government subsidy or government production or provision of the commodity.

9. Once public goods are produced, it is costly to exclude people from their use (the nonexclusion problem), and everybody can consume the goods simultaneously with everyone else (the nonrivalry problem). The free market fails to provide public goods efficiently because of the "free-rider" problem.

10. Total spending on goods and services by all three levels of government exceeds 20 percent of U.S. GDP. State and local governments spend the bulk of their revenues on services that primarily benefit people in their community and rely heavily on the property and sales taxes as a source of revenue. Federal spending is generally aimed at activities that are national in scope. Over 90 percent of federal revenue comes from individual and corporate income taxes plus Social Security and other employment taxes. Transfer payments through government account for an additional 10% of U.S. national income.

3. Vocabulary practice: switching.

Get ready for an oral (written) translation exercise based on the economic terms in bold, as well as other relevant words and phrases from the text.

Вводимые государством ценовые ограничения; transaction costs; иметь высокую стоимость; transfer payment; варьироваться в зависимости от рынков; erratically; to incur transaction costs; ultimate consumer; облегчать (способствовать) движение в сторону равновесия; corporate income tax; public goods; превышать точку равновесия; price swings;

смягчать, сдерживать резкие скачки цен; social security tax; поддерживать конкурентные рынки; to redistribute sth equitably; переносить издержки на потребителей; externality; “free-rider” problem; property tax; sales tax; обеспечить условия для предпринимательской деятельности; nonexclusion problem; иметь национальный масштаб; federal revenue; to answer the “what”, “how” and “for whom” questions; пять экономических целей правительства; government in a market economy; рост поставок; ultimate producer; проявлять тенденцию к снижению цен; to shrink quantities; влияния на цену; individual income tax; усиливающее действие; monetary prices; снижать риск ведения дел; price spreads; превышать транзакционные издержки; to be risklessly profitable; price ceiling; to fail to supply the socially optimal level of goods; price floor; эффективно распределять ресурсы; scarce resources ; equilibrium price; на рынке; speculator; intermediary; взаимодействовать; offsetting effect; подавлять возможности получения прибыли; employment tax; облегчать достижение эффективности; nonrivalry problem; разрыв в ценах между рынками; to set prices at certain values; заморозить альтернативные издержки; national income; создать дефициты\излишки; the bulk of the revenue; адаптировать производство в соответствии с ч-либо; consumers’ demands; to compel efficient forms of production; владеть ценными ресурсами; to step in ; arbitrageur; to provide legal environment; competitive market; содействовать развитию конкурентных рынков.