Questions for economic reasoning and discussion

Date: 2015-10-07; view: 525.

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The theory of supply and demand is perhaps one of the most fundamental concepts of economics and it is the backbone of a market economy. The supply and demand model describes how prices vary as a result of a balance between product availability and consumer demand.

Since contemporary economies rely on the market forces of supply and demand instead of government forces to distribute goods and services there must be a method for determining who gets the products that are produced. This is where the laws of supply and demand begin to work. By themselves these laws give us basic information, but when working together they are the key to distribution in a market economy.

It is not enough for a buyer to want or desire an item. He or she must show the ability to pay and then the willingness to pay. In economics, demand is comprised of people's desire, willingness and ability to purchase particular amounts of goods or services at certain prices in a given period of time. To the economists consumers make rational choices about how much to buy and how to spend their income on the products that will give them the greatest satisfaction at the least cost. So, demand describes the behavior of buyers.

What factors alter a consumer's desire, willingness and ability to pay for products? Some factors include consumers' income and tastes, the prices and availability of related products like substitutes or complementary goods, and the item's usefulness.

Substitutes are goods that satisfy similar needs and which are normally consumed in place of each other. As the price of one substitute declines, demand for the other substitute will decrease. Butter and margarine are close substitutes. If the price of butter goes up, then people will be apt to substitute margarine for butter.

Complementary goods are those that are normally consumed together (e.g., DVD players and DVD movies). An increase in the price of a product will diminish demand for its complement while a decrease in the price of a product will increase demand for its complement.

Think of the item's usefulness this way. It is a hot summer day and you are gasping for a drink*. You come across a lemonade stand and gulp down a glass*. It tasted great so you want another. This second glass is marginal utility meaning an extra satisfaction a consumer gets by purchasing one more unit of a product. But now you reach for a third glass. Suddenly your stomach is bloated and you are feeling sick. That means that the law of diminishing marginal utility comes into effect!

The law of demand states that the higher the price of a product, the fewer people will demand that product, that is, demand for a product varies inversely with its price, all other factors remaining equal*. Factors other than a good's price which affect the amount consumers are willing to buy are called the non-price determinants of demand. The law of demand expresses the relationship between prices and the quantity of goods and services that would be purchased at each and every price. In other words, the higher the price of a product, the lower the quantity demanded.

Economists like to look at things graphically. A demand schedule is a table showing the number of units of a product that would be purchased at various prices during a given period of time. The information presented in a graphic form is called ademand curve. It shows an inverse relationship between the price and the quantity demanded. Or to put it another way, the demand curve represents the quantities of a product or service which consumers are willing and able to buy at various prices, all non-price factors being equal. The demand curve slopes downward from left to right based on the law of demand.

The advantage of the curve is that it enables economists to see the relation between price and quantity demanded and to calculate approximately what the demand would be for those prices falling in between the prices that are in the demand schedule. Each point along the curve represents a different price-quantity combination.

Demand schedule for cut jeans

Since the quantity demanded is greater at a lower price the demand curve shifts to the right. On the other hand, decreased demand causes the curve to shift to the left because at a higher price the quantity demanded is less.

The key point is to distinguish between demand and the quantity demanded.

Ú Demand refers to how much of a product or service is desired by buyers.

Ú The quantity demanded is the amount of a product that people are willing to buy at a certain price.

The difference is subtle but important. If the demand of ice cream goes up in summer it is because consumptive demand has truly increased, clearly it is hot. In this case the business can most likely raise prices without suffering a cut in sales. This is a change in the quantity demanded. In winter the business incurs a sales fall at the same price. The only way out of increasing sales is to reduce the price. As a result of a cut in price the increased sales of ice cream means that consumer demand has artificially been manipulated. In reality, actual demand is low but extra efforts have to be made to increase sales. This leads to a change in demand.

Economists distinguish two different ways that the quantity of purchases of a product can change.

Ø According to the law of demand a change in price results in a change in the quantity demanded, that is, more will be purchased but only at a lower price. Thus, the only thing that can change the quantity demanded is a change in the market price, all the non-price determinants remaining the same.

Ø When one of the non-price factors changes there will be a change in demand, the good's price being equal.

All of the non-price determinants (changes in the size of the market, income of the average consumer, population size, the prices and availability of related goods, consumer preferences) are directly related to consumers. In other words, at any given price, consumers will be willing and able to purchase either more or less of a product that depends on its price.

To understand better the theory of supply and demand it is necessary to know how much buyers and sellers respond to price changes. This responsiveness is called elasticity.

Elasticity varies among products because some products may be more essential to the consumer. A good or service is considered to be highly elastic if a slight change in price leads to a sharp change in the quantity demanded. A price increase of a product or service that isn't considered a necessity will discourage more consumers to buy this product or service. On the other hand, an inelastic good or service is one in which changes in price bring about only modest changes in the quantity demanded, if any at all. Products that are necessities are more insensitive to price changes because consumers will continue buying these products despite a price rise. It is known as the price elasticity of demand.

In economics, the price elasticity of demand is an elasticity that measures the nature and degree of the relationship between changes in the quantity demanded of a commodity and changes in its price.

One typical application of the concept of elasticity is to consider what happens to customer demand for a product when prices increase. As the price of a product rises, consumers will usually demand less of that product, perhaps by consuming less, substituting another product for it, and so on. The greater the extent to which demand falls as price rises, the greater the price elasticity of demand is.

Demand is called elastic if a small change in price has a relatively large effect on the quantity demanded.

The number and quality of substitutes for a product are the basic influence on price elasticity of demand. If the prices of substitutes remain the same, a rise in the product's price will discourage consumers from buying this product. On the other hand, if there is a price cut in the product, consumers will substitute other items for this product. Thus, the demand for this product tends to be elastic. In general, demand is elastic for non-essential commodities (visits to theatres or concerts, holidays, parties, etc.)

However, there are some goods that consumers cannot consume less of, and cannot find a proper substitute even if prices rise. Some essential goods that are relatively inexpensive and for which it is difficult to find substitutes are said to have inelastic demand. To put it another way, a change in price results in a relatively small effect on the quantity demanded.

COMMENTS:

to gasp for a drink – помирати від спраги;

to gulp down a glass – жадібно/квапливо проковтнути напій;

all other factors remaining equal – за умов, що усі інші фактори залишаються незмінними.

Exercise 1. Read, translate into Ukrainian in writing and memorize the following economic terms and concepts.

Exercise 2. Give the Ukrainian equivalents for the following.

1. the most fundamental concepts ________________________________________________

2. product availability _________________________________________________________

3. to rely on the market forces of supply and demand ________________________________ ________________________________________________________________________

4. in place of each other _______________________________________________________

5. to substitute margarine for butter ______________________________________________

6. an extra satisfaction _________________________________________________________

7. to describe the behavior of buyers _____________________________________________

8. factors other than a good's price _______________________________________________

9. the number of units of a product ______________________________________________

10. all non-price factors being equal ______________________________________________

11. the key point is to distinguish ________________________________________________

12. the demand was artificially manipulated ________________________________________

13. demand at any given price ___________________________________________________

14. to be more essential to the consumer ___________________________________________

15. a sharp change in the quantity demanded _______________________________________

16. to bring about only modest changes in the quantity demanded _______________________

_________________________________________________________________________

17. by substituting another product for it ___________________________________________

18. a rise in the product's price __________________________________________________

19. to find a proper substitute ___________________________________________________

20. the non-essential commodities ________________________________________________

Exercise 3. Find the English equivalents for the following.

1. Основа ринкової економіка ________________________________________________

2. готовність платити ________________________________________________________

3. змінювати бажання споживача ______________________________________________

4. наявність спорідненої продукції ____________________________________________

5. близькі товари-замінники __________________________________________________

6. зменшувати попит на його товар-супутник ___________________________________ ________________________________________________________________________

7. ще одна одиниця продукції ________________________________________________

8. робити зважені вибори ____________________________________________________

9. нецінові визначники попиту ________________________________________________

10. за будь-якою ціною _______________________________________________________

11. обернено пропорційна залежність між ціною та величиною попиту _______________ ________________________________________________________________________

12. крива попиту опускається полого ___________________________________________

13. які знаходяться між цінами _________________________________________________

14. не зазнаючи зменшення товарообороту/обсягу продажу ________________________ ________________________________________________________________________

15. додаткові (особливі) зусилля _______________________________________________

16. зміна ринкової ціни _______________________________________________________

17. різнитися між товарами ___________________________________________________

18. незначна зміна ціни/в ціні __________________________________________________

19. не вважатися товаром першої необхідності ___________________________________

Exercise 4. Match these nouns/noun phrases, prepositions (if necessary) and nouns/noun phrases as they occur together in the text. Translate the expressions they make into Ukrainian.

Exercise 5. Match the verbs/verbal phrases, prepositions (if necessary) and nouns/noun phrases as they occur together in the text. Translate the expressions they make into Ukrainian.

Exercise 6. Copy out from the texts the sentences containing the following words and word-combinations and translate these sentences into Ukrainian.

1. consumer demand – ________________________________________________________ ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

2. the key to distribution – _____________________________________________________ ____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

3. will be apt to substitute – ____________________________________________________ ____________________________________________________________________________________________________________________________________________________________________________________________________________________________________

4. to the economists – ________________________________________________________

________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

5. the non-price determinants – __________________________________________________

____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

6. the demand curve represents – ________________________________________________ ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

7. it enables economists – ______________________________________________________

____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

8. but only at a lower price – ____________________________________________________ ____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

9. will discourage more consumers – ______________________________________________ ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

10. more insensitive to price changes – ____________________________________________ ____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

11. substituting another product for it – ____________________________________________ ________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

12. essential goods – ___________________________________________________________

____________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________________

Exercise 7. Choose words and word-combinations that have the same or similar meaning to the words listed below. More than one is possible.

1. додаткове задоволення (2) – ________________________________________________

2. за різними цінами (2) ______________________________________________________

3. задовольнити попит (3) – ___________________________________________________

4. зазнавати збитків (3) – _____________________________________________________

5. зменшувати (3) – __________________________________________________________

6. значна зміна (2) – _________________________________________________________

7. знижена ціна (2) – _________________________________________________________

8. зниження ціни (3) – ________________________________________________________

9. мати схильність (2) – ______________________________________________________

10. помірна зміна (2) – ________________________________________________________

11. реагувати (2) – ____________________________________________________________

12. споживчий попит (2) – _____________________________________________________

13. товар (3) – ________________________________________________________________

14. товари першої необхідності (3) – ____________________________________________

Exercise 8. Replace the words or word combinations in bold type with their synonyms.

1. When two goods satisfy similar needs a change in the price of one item will result in a shift in the demand for a substitute. 2. Two goods are described as substitutes when a price cut of one good leads to a fall in the demand for the other. 3. If the price of one of the substitutes diminishes while the prices of other goods remain the same, people tend to substitute the cheaper good for goods they would have bought otherwise. 4. If a change in price leads to a great change in quantity demanded, the product is said to have elastic demand. 5. Demand curve slopes downward from left to right showing the quantity demanded for a particular product at various prices. 6. If prices are high, the quantity demanded will decline and if prices are low, the quantity demanded will increase.7. Diminishing marginal utility explains that after consuming a certain amount of a commodity a person gains less and less satisfaction from each extra purchase of this commodity. 8. Demand is considered to be inelastic when a price change of a commodity leads to a modest change in consumer demand. 9. Demand for necessities is always inelastic.

Exercise 9. Translate the words in brackets into Ukrainian.

1. The law of (спадної граничної корисності) says that the greater the quantity of any good consumed, (тим менша гранична корисність) derived from consuming (ще однієї одиниці) of the same good. 2. (Шкала попиту) shows the quantity of a product that buyers would be willing and able to purchase (за різними можливими цінами) in a given time, (за умови, що усі інші речі залишаються однаковими). 3. (Крива попиту) is (графічне зображення) of the relationship between a price of a good and the quantity of that good (яку потребують покупці). 4. The demand for one good can be affected by the price (інших споріднених товарів). 5. If any of the factors that cause (попит на товар) to increase or decrease, occur (величина попиту) at any particular price (буде вищою або нижчою). 6. Change in demand results in a shift of the demand curve (наліво або направо in response to a change (одного з нецінових факторів), the good's price remaining constant. 7. To the economists, (цінова еластичність попиту) is the degree to which the demand is affected by a change (ціни товару). 8. The most important circumstance that (впливає на еластичність попиту) is (наявність взаємо замінюваних товарів).

Exercise 10. Pair the halves of the sentences and write the completed sentences. Translate them into Ukrainian.

Exercise 11. Match each term in column A with its definition in column B.

Exercise 12. Translate the sentences into English using the active vocabulary.

Exercise 13. Answer the following questions.

1. Why is the theory of supply and demand considered one of the most fundamental concepts of economics? 2. What is demand? 3. What factors alter consumer demand? 4. What goods are considered to be related? 5. What goods are called substitutes? 6. What are complementary goods? 7. What is the item's usefulness? 8. What does the law of diminishing marginal utility explain? 9. What does the law of demand state? 10. What relationship does the law of demand describe? 11. What non-price factors are covered by the “all other factors remaining equal” clause in the law of demand? 12. Why does the law of demand have an inverse relationship? 13. What does demand schedule show? 14. What is demand curve? 15. What does the demand curve represent? 16. What causes the demand for an economic product to increase or decrease at each and every price? 17. What is the difference between demand and quantity demanded? 18. What does a change in price lead to? 19. How does the price of goods or services affect the quantity that buyers demand? 20. How do factors other than a good's price affect demand? 21. What is elasticity as an economic concept? 22. Why does elasticity vary among products? 23. Why does a price increase of a product discourage consumers to buy it? 24. When does a price change bring about only a slight change in the quantity demanded? 25. When does a price change cause a sharp change in the quantity demanded? 26. What goods are called necessities? 27. What does the price elasticity of demand mean? 28. What factors affect elasticity of demand? 29. What demand is considered as elastic? 30. What goods and services is demand elastic for? 31. When demand is said to be inelastic? 32. What goods and services is demand inelastic for? 33. Why is demand for necessities inelastic?

1. What would happen to the demand for Pepsi-Cola if the price of Coca-Cola were doubled? Why would it happen?

2. Below is a list of consumer goods and services. Determine whether an item has an elastic or inelastic demand. Indicate the most important reason from the list below.

Reasons: necessity, luxury, many available substitutes, a few available substitutes, inexpensive, expensive, easy to delay purchase, difficult to delay purchase.

3. Choose the right variant. Only one is possible.

1.According to the law of demand, when the price of a good increases,

a. people will choose to purchase less of that good and more of other.

b. people will provide more of that good.

c. people will choose to purchase more of that good and less of other.

d. people will provide less of that good.

2.What does the law of demand state?

a. As incomes increase, people consume more of all goods.

b. The demand for a good increases with the number of consumers in the market.

c. As the price of a good declines, consumers purchase more of that good.

d. The supply of a good increases in proportion to the demand for it.

3.Which of the following provides an example of complementary goods?

a. Pepsi and Coca-Cola

b. French fries and catsup (кетчуп)

c. Milk and orange juice

d. Beef and pork

4.Which of the following would tend to have an inelastic demand curve?

a. Complementary goods

b. Luxuries

c. Goods with substitutes

d. Necessities

5.Which of the following best describes a product with elastic demand?

a. Consumers buy almost the same quantity of this product at a low price as they do at a high price.

b. A relatively large price cut is necessary to convince consumers to buy a little more of this product.

c. When the price of this product is reduced, consumers tend to buy more of it.

d. A relatively small price reduction will cause consumers to buy a lot more of this product.

6.The demand for a product tends to be elastic if

a. the product has a large number of good substitutes.

b. consumers generally spend a small fraction of their income on the product.

c. the product is regarded as a necessity.

d. the product has few good substitutes