Markets, prices, and money

We know now that the basic coordinating mechanism of a capitalist economy is the market system. Without a market economy, there is no capitalism. Deci­sions made by buyers and sellers of products and resources become effective through a system of markets. We already know that a market is a mechanism or arrangement which brings buyers (demanders) and sellers (suppliers) into contact with one another. The preferences of sellers and buyers are reflected in their choices, and the outcome of these choices is a set of prices. These prices are guideposts on which resource owners, entrepreneurs, and consumers make and revise their free choices as they pursue their self-interests.

Just as competition is the controlling mechanism, so a system of markets and prices is the basic organizing force. The market system is an elaborate communication system through which innumerable individual free choices are recorded, summarized, and balanced against one another. Those who obey the dictates of the market system are rewarded; those who ignore them are penalized by the system. Through this com­munication system, society decides what the economy should produce, how produc­tion can be efficiently organized, and how the fruits of productive effort are distributed among the individual economic units which make up capitalism.

The «interaction» between demand and supply in markets influences prices. Market-determined prices — that is, prices determined by producers and con­sumers acting in their own best interest — are the signals that help define the trade-offs we face and that ultimately lead society as a whole to allocate resources efficiently. Understanding how changes in supply and demand affect prices is an important component of economic literacy. When a prospective college student, for example, contemplates majors, she might speculate about where demand for workers is increasing fastest, because wages and job opportunities will probably be greatest in those occupations.

When prices change then trade-offs change, and people's decisions change. Our college student might discover, for example, that the demand for software engineers has increased and, subsequently, that wages for those jobs have also risen. Also, many public policy decisions, such as changes in the tax code, in­volve changing incentives with the hope of changing behaviour.

Many times people are unhappy with the prices that markets produce, but an economically literate person realizes that prices are important signals that reflect underlying changes in supply and demand. Consumers and producers respond to these signals in ways that make society better off. When governments interfere with these market adjustments, society is usually worse off.

When people hear the word «price» they usually associate it with the word «money». Virtually all economies, advanced or primitive, use money. Money per­forms several functions, but first and foremost it is a medium of exchange: it makes trade easier. The use of money facilitates the exchange of goods and ser­vices which specialization requires.

Exchange can, and sometimes does, occur on the basis of barter, that is, swapping goods for goods. But barter can pose serious problems for the economy because it requires a coincidence of wants between the two transactors. If this co­incidence of wants does not exist, trade is blocked.

To overcome such a stalemate, economies use money, which is simply a con­venient social invention to facilitate exchanges of goods and services. Historically, cattle, cigarettes, shells, stones, pieces of metal, and many other commodities have been used, with varying degrees of success, as a medium for facilitating ex­change. But to be money, an item needs to pass only one test: it must be gener­ally acceptable to sellers in exchange for goods and services. Money is socially de­fined: whatever society accepts as a medium of exchange is money. Most econo­mies use pieces of paper as money.

On a global basis the fact that different nations have different currencies complicates international specialization and exchange. However, foreign ex­change markets permit US residents, Japanese, Germans, Britons, and Mexicans to exchange dollars, yen, euros, pounds, and pesos for one another to complete international exchanges of goods and services.

Vocabulary

decision (n) решение	Decisiontheory in economics, psychology, philosophy, mathematics, and statistics is concerned with identifying the values, uncertainties and other issues relevant in a given decision, its rationality, and the resulting optimal decision.
resource (n) ресурс	A resource is a source or supply from which benefit is produced. Typically resources are materials, services, staff, or other assets that are transformed to produce benefit and in the process may be consumed or made unavailable.
entrepreneur (n) предприниматель	Entrepreneur is a loanword from French. It is defined as an individual who organizes or operates a business or businesses.
entrepreneurship (n) предпринимательство	Entrepreneurship is the process of identifying and starting a new business venture, sourcing and organizing the required resources, while taking both the risks and rewards associated with the venture.
to distribute (among) (v) распределять (среди)	The money was distributed among schools in the area.
interaction (n) взаимодействие	Interaction is a kind of action that occurs as two or more objects have an effect upon one another.
affect prices влиять на цены	Many factors can affect the price of a stock to rise or fall – from specific news about a company’s earnings to a change in how investors feel about the stock market in general.
job opportunities возможности трудоустройства	Online applications are stored on a secure site of the Massachusetts Port and help you to choose one of all our job opportunities by clicking on the check box.
policy decisions политические решения	Policy Decisions is a state of the policy administration solution, including a vast array of business rules and functions.
market adjustment регулирование рынка	Market adjustment comes in one of eight varieties, given that the two curves comprising the market (demand curve and supply curve) can either increase or decrease, individually or simultaneously.
transactor (n) посредник, сторона в сделке, участник сделки	As we know, a transactor is a businessman who conducts or carries on business or negotiations or a person engaged in commercial or industrial business (especially an owner or executive).
stalemate (n) тупик; мертвая точка	As a result of government debts this country appears trapped in a dangerous economic stalemate.
foreign exchange markets валютные рынки	The foreign exchange market ( or currency market) is a global decentralized market for the trading of currencies.

Vocabulary exercises

1. Which of the following statements are true/false according to the text? Correct the false sentences:

1. We already know that a market is a mechanism or arrangement which brings buyers into contact with one another.
2. Deci­sions made by buyers and sellers of products and resources become effective through a system of markets.
3. These prices are guideposts on which resource owners, entrepreneurs, and consumers make and revise their free choices as they pursue their self-interests.
4. Through this com­munication system, society decides what the economy should produce, how produc­tion can be efficiently organized, and how the fruits of productive effort are distributed among the businessmen.
5. The «interaction» between demand and supply in markets influences prices.
6. Understanding how changes in supply and demand affect prices is an important component of political life.
7. When a prospective college student, for example, contemplates majors, she might speculate about where demand for workers is increasing fastest, because wages and job opportunities will probably be greatest in those occupations.
9. Many public policy decisions, such as changes in the tax code, in­volve changing incentives with the hope of changing behaviour.
10. But barter can pose serious problems for the economy because it requires a coincidence of wants between more than seven transactors.
11. Economies use money in order to overcome such a stalemate.
12. Foreign ex­change markets permit US residents, Japanese, Germans, Britons, and Mexicans to exchange dollars, yen, euros, pounds, and pesos for one another to complete international exchanges of goods and services.

2. Fill in the gaps with the words and expressions given below:

1. Without a market economy, there is no capitalism and ________ made by buyers and sellers of products and resources become effective through a system of markets.

2. The _________ of sellers and buyers are reflected in their choices.

3. _________ is the process of identifying and starting a new business venture, sourcing and organizing the required resources.

4. Just as _______ is the controlling mechanism, so a system of markets and prices is the basic organizing force.

5. Those who obey the dictates of the ________ are rewarded; those who ignore them are penalized by the system.

6. The fruits of productive effort ________ the individual economic units.

7. The ________ between demand and supply in markets _______ prices.

8. An economically literate person realizes that prices are important signals that reflect underlying changes in _______ and demand.

9. When prices change then trade-offs change, and people's _______ change.

10. The ______ for software engineers has increased lately and, subsequently, that wages for those jobs have also risen.

11. When governments interfere with these_________, society is usually worse off.

12. When people hear the word «price» they usually associate it with the word «_______».

13. But barter can pose serious problems for the economy because it requires a coincidence of wants between the two ________.

14. Historically, cattle, cigarettes, shells, stones, pieces of metal, and many other _________ have been used, with varying degrees of success, as a medium for facilitating ex­change.

15. On a global basis the fact that different nations have different _______ complicates international specialization and ________.

Entrepreneurship, market adjustments, commodities, interaction, decisions, affect prices, influences, transactors, supply, market system, exchange, competition, money, deci­sions, preferences, demand, currencies, are distributed among.

3. Find in the text English equivalents for the following:

решение
ресурс
предприниматель
предпринимательство
распределять (среди)
взаимодействие
влиять на цены
возможности трудоустройства
политические решения
регулирование рынка
участник сделки
тупик
валютные рынки

4. What do definition in A column correspond to? Fill in Column B:

A	B
1. Obstacles that make it difficult or impossible for potential producers to enter a particular market.	a
2. The ability to influence the market price of a good or service.	b
3. A group of companies who all agree to sell something at the same price so that they can all make profits without competing with one another.	c
4. A market in which a few firms control such a large of total industry output that they can influence market price.	d
5. A market consisting of many powerless firms.	e
6. A voluntary union of two companies where they think they will do better by amalgamating.	f