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Supply, demand and market prices




I. Read and memorize the following words, word- combinations and word-groups:

market economy

price

e.g. Market economies are directed by prices. to ration , ,

e.g. Prices ration scarce resources, and they motivate

production, to attend an auction e.g. Did you ever attend an auction? rationing effect

e.g. What you saw at the auction was the rationing effect of prices.

items for sale bidder

e.g. The person leading the safe (the auctioneer) offered

individual items for sale to the highest bidder, to drive out of the market

e.g. Price decreases drive producers out of the market,

the level of output

e.g. Prices encourage producers to increase or decrease

their level of output,

the law of demand

quantity of goods and services

e.g. The law of demand describes the relationship between prices and the quantity of goods and services that would be purchased at each price, elasticity ;

e.g. Elasticity describes how much a change in price affects

the quantity demanded.

supply ;

e.g. Supply refers to the number of items that sellers will

offer for sale at different prices at a particular time and place.

II. Give English equivalents of the following:

III. Fill in the blanks with appropriate words:

1. Economists often use... to illustrateand explain their work. 2. Market economics are directed by.... 3.... is a consumer's willingness and ability to buy a product or service at a particular time and place. 4. More people can afford to buy... at a lower price than at a higher price. prices sellers demand tables and graphs consumers market auction an item

5. Buyers and sellers have full knowledge of the prices price quoted in the....

6. In some countries prices are set bythe....

7. Many... who are concerned about the environment are refusing to buy soft drinks in plastics.

8.... will offer more of a product at ahigher price and less at a lower price.

IV. Read and translate the text:

Market economies are directed by prices. Prices ration scarce recources, and they motivate production. As a general rule, the more scarce something is, the higher its price will be, and the fewer people will want to buy it. Economists describe this as the rationing effect of prices.

Prices encourage producers to increase or decrease their level of output. Economists refer to this as the production- motivating function of prices. Prices send out signals to buyers and sellers, keeping the economy responsive to the forces of supply and demand.

In a free market economy, prices are determined by the interaction of the forces of supply and demand. Perfectly competitive markets are those in which many buyers and sellers, with full knowledge of market conditions, buy and sell products that are identical to one another.

Demand is a consumer's willingness and ability to buy a product or service at a particular time and place. If you would love to own a new pair of athletic shoes but can't afford

them, economists would describe that your feeling are desire, not demand. If, however, you had the money and were ready to spend it on shoes, you would be included in their

demand calculations.

The law of demand describes the relationship between prices and the quantity of goods and services that would be purchased at each price. It says that all else being equal, more items will be sold at a lower price than at a higher price.

The degree to which price changes affect demand will depend upon the elasticity of demand for a particular item.

If total revenue increased following a price decrease, demand would be elastic. If the price decrease led to a decrease in

total revenue, the demand for the item would be described as inelastic.

The demand for some goods and services will be inelastic for one or more of the following reasons:

They are necessities.

It is difficult to find substitutes.

They are relatively inexpensive.

It is difficult to delay a purchase.

Sometimes things happen that change the demand for an item at each and every price. When this occurs, we have an increase or a decrease in demand.

Supply, which is the quantity of goods or services that sellers offer for sate at all possible prices at a particular time and place, varies directly with price. In other words, at a higher price, more goods and services will be offered for sale than at a lower one, and vice versa.

The price at which goods and services actually change hands is known as the equilibrium, or market price. It is the point at which the quantity demanded exactly equals the

quantity supplied. Market price can be represented graphically as the point of intersection of the supply and demand curves.

Shifts in demand or supply will affect market price. When everything else is held constant, an increase in demand will result in an increase in market price, and vice versa. Similarly, an increase in supply will result in a decrease in price, and vice versa.

The market price is the only price that can exist for any length of time under perfect competition conditions, Perfect competition exists when the following conditions prevail:

Buyers and sellers have full knowledge of the prices quoted in the market,

There are many buyers and sellers so that no individual or group can control prices.

The products are identical with one another. Therefore, it would not make sense for buyers to pay more than the market price, nor for sellers to accept less.

Buyers and sellers are free to enter or leave the market at will (pp.2334).

V. Answer the following questions:

1. What is the rationing effect of prices?

2. What are the functions of prices?

3. How are prices determined in a free market economy?

4. What causes prices to rise and fall in a market economy?

5. What is demand?

6. What does the low of demand describe?

7. When is demand described as elastic?

8. Why is the demand for some goods and services inelastic?

9. What does supply refer to?

10. What is equilibrium or market price?

VI. Define the terms:

market price  
rationing effect of prices perfectly competitive markets production-motivating function of prices demand buyers sellers

VII. Translate into English:

1. ֳ . 2. ֳ . 3.

䳺 . 4. ֳ, , . 5. . 6. , . 7. .

VIII. Read and dramatize the following dialogue:

Maurice: Haven't seen you for a long time. What have you been busy with?

Lusy: I've been pretty busy. Do you know my friend Susan?

M.: Yes, I do.

L.: I went into business with her.

M.: Really? How is it going on?

L.: Fine, thank you.

M.: What kind of business is it?

L.: We developed our own special recipe for homemade ice-cream, and we decided to sell ice-cream cones to students every day after school.

M.: How much does your ice-cream cost?

L.: It costs $1.60 per cone.

M.: How did you define the cost of your product?

L.: Oh, it was not very difficult. First of all we decided to learn the demand of our consumers. For this purpose we

conducted a survey to see if students were interested in the idea. Each student was asked the following question: Would you spend $.50 to have an ice-cream cone for and after school snack? This question was repeated using higher and higher prices up to $25 per cone. The results

of the survey were assembled in a demand schedule, a table showing the quantities of a product that would be purchased at various prices at a given time.

M.: Oh, it is very interesting. I'd like to see this demand schedule for ice-cream cones.

L.: If you wonder I can show it to you. I've got it with me. Look here!

-------------------------------------------------------------Demand schedule for ice-cream cones

Price Per Cone Quantity Demanded

$.50 190

.75 175 1.00 125

1.25 85

1.50 65

1.75 50

2.00 40

M.: The survey results illustrated the law of demand in action, didn't they?

L.: You are right. We also made the demand curve, which illustrated the demand for ice-cream cones. It also enabled us to estimate what the demand would be for those prices falling in between the prices we surveyed. Although the students were not questioned about how many cones they would buy if the selling price were $1.60, the curve lets us estimate the number would be about 55.

M.: Nice for you. Now you seem to know a lot about business.

L.: Not everything yet- The subject becomes quite technical.

M.: I'm glad to hear it. It's time to go now. See you later.

Bye!

IX. Make up your own dialogue using the following words, expressions and words-combinations:

quantity of goods and services market economy
rationing effect of price auctioneer
to offer items for sale elasticity
to attend an auction bidder

X. Refer the following statements to the past;

M o d e l: Economic incentives influence our decision about what and where to buy.

Economic incentives influenced our decision about what and where to buy.

1. What you see at the auction is the rationing effect of prices. 2. Prices encourage producers to increase their level of output. 3. The law of demand describes the relationship between prices and the quantity of goods and services.

4. They sell these goods because they want to have a profit from such transaction. 5. Adam Smith describes the principal elements of the economic system in his book The Wealth of Nations.

XI. Ask questions to which the following statements are answers:

M o d e l: This work seemed easy. Did this work seem easy?

1. The development of modern economics began in the 17th century. 2. Large corporations used economists to study the way to do business. 3. Peter received his first paycheck of $135 yesterday. 4. I went into business last year. 5. First of all we decided to learn the demand of our consumers.

XII. Translate into English:

1. . 2. . 3. ֳ . 4. , .

5. .

XIII. Communicative situations:

1. If you owned an ice-cream shop at a seaside resort and additional ice-cream shops were opening in your area because of increasing prices, how would you take advantage of the use of substitute products to compete more effectively?

How would you make use of the concept of demand elasticity in making decisions whether or not to raise your prices for your specially items such as shakes, sundaes, and banana splits?

2. When the forces of supply and demand are at work in a market economy, the equilibrium price is the only one that matters. All other prices are irrelevant (beside the point). Explain this statement.

3. The law of demand works because consumers have the ability to substitute. The law of supply works because producers have the ability to substitute. Explain these statements.





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