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Economics and Economic Methods





 

DISCOVERING CONNECTIONS

 

1. Can you explain the difference between wants and needs? Is it possible to satisfy all the desires? Why?

2. Do you know what scarcity is? Do you agree that scarcity is typical for all nations?

3. What is a luxury and what is a necessity?

 

READING

 

Text 1

As you read the text, focus on the difference between macroeconomics and microeconomics.

Economics: the Study of Scarcity and Choice

Our world is a finite place where people, both individually and collectively, face the problem of scarcity. Scarcity is the condition in which human wants are forever greater than the available supply of time, goods, and resources. Because of scarcity, it is impossible to satisfy every desire. Pause for a moment to list some of your unsatisfied wants. Perhaps you would like a big home, gourmet meals, designer clothes, clean air, better health care, shelter for the homeless, more leisure time, and so on. Unfortunately, nature does not offer the Garden of Eden, where every desire is fulfilled. Instead, there are always limits on the economy’s ability to satisfy unlimited wants.

You may think your scarcity problem would disappear if you were rich, but wealth does not solve the problem. No matter how affluent an individual is, the wish list continues to grow. The condition of scarcity means all individuals, whether rich or poor, are dissatisfied with their material well-being and would like more. What is true for individuals also applies to society.

Economics is the study of how society chooses to allocate its scarce resources to the production of goods and services in order to satisfy unlimited wants. Society makes two kinds of choices: economy-wide, or macro choices and individual, or micro, choices. The prefixes macro and micro come from the Greek words meaning “large” and “small,” respectively. Reflecting the macro and micro perspectives, economics consists of two main branches: macroeconomics and microeconomics.



Macroeconomics

The old saying “Looking at the forest rather than the trees” fits macroeconomics. Macroeconomics is the branch of economics that studies decision making for the economy as a whole. Macroeconomics examins economy-wide variables, such as inflation, unemployment, growth of the economy, money supply, and national incomes. Macroeconomic decision making considers such “big picture” policies as the effect of balancing the federal budget on unemployment and the effect of changing the money supply on prices.

Microeconomics

Examining individual trees, leaves, and pieces of bark, rather than surveying the forest, illustrates microeconomics. Microeconomics is the branch of economics that studies decision making by a single individual, household, firm, industry, or level of government. Microeconomics applies a microscope to specific parts of an economy, as one would examine cells in the body. The focus is on small economic units, such as economic decisions of particular groups of consumers and businesses.

We have described macroeconomics and microeconomics as two separate branches, but they are related. Because the overall economy is the sum or aggregation of its parts, micro changes affect the macro economy, and macro changes produce micro changes.

 

Vocabulary Focus

 

Easily confused words: economic / economics / economy / economical / economist / economize.

Study the explanations of the words.

Economic means concerned with the organization of the money, industry, and trade of a country, region, or social group. A business that is economic produces a profit.

Something that is economical does not require a lot of money to operate. If someone is economical, they spend money carefully and sensibly. Economicalalso means using the minimum amount of something that is necessary.



 

Ex. 1. Complete the following sentences with the appropriate word from the list below.

economic economical economics economist economize economy

1. A good manager is _____ in the use of his funds.

2. An _____ person saves money and expense wherever possible.

3. An _____ is a person who studies, teaches, or writes about economics.

4. By exercising strict _____ he saved enough money to retire early.

5. By using _____ in buying food and clothes, we were soon able to save money for the new car we needed.

6. _____ is a social science concerning behavior in the fields of production, consumption, distribution, and exchange.

7. In times of difficulties we all have to _____.

8. It is much more _____ to buy in bulk.

9. Nations experience different rates of _____ growth.

10. The country is in the period of _____ and industrial crisis.

 

Ex. 2. From two columns choose the words with similar meaning and arrange them in pairs.

A B
1) scarcity a) insufficiency / shortage
2) goods b) merchandise
3) degree of merit c) manufacture
4) economical d) quality
5) production e) work done for somebody or something
6) service f) infinite
7) unlimited g) option
8) choice h) thrifty
9) pervasive i) all-encompassing

Ex. 3. From two columns choose the words with opposite meaning and arrange them in pairs.

A B
1) wealth 2) to satisfy 3) scarcity 4) to raise 5) to improve 6) to spend 7) revenue 8) macro a) abundance b) poverty c) to dissatisfy d) to lower e) to make worse f) to economize g) expenditure h) micro

 

Ex. 4. Form the following pairs of derivatives and memorize them.

V ® N N ® A
govern   apply   grow     provision   improvement   development threat   economics nation       wealthy     scientific

Ex. 5. Match English and Russian equivalents.

A B
1) удовлетворять каждое (любое) желание 2) столкнуться с проблемой редкости (нехватки) 3) перспективный взгляд 4) размещать ресурсы 5) вечная проблема 6) существенный экономический рост 7) улучшать качество 8) быть неудовлетворенным 9) богатый индивидуум 10) способность экономики 11) неудовлетворенные потребности a) to face the problem of scarcity b) to satisfy every desire c) unsatisfied wants d) conomy’s ability e) an affluent individual f) to be dissatisfied g) to improve the quality h) substantial economic growth i) perpetual problem j) to allocate resources k) perspective overview

 



Comprehension

 

Ex. 1. Expand the sentences, using the text.

1. Our world is a finite place where people … .

2. Scarcity is the condition in which… .

3. Economics is the study of how … .

4. Macroeconomics is the branch of economics that … .

5. Microeconomics is … .

 

Ex. 2. Choose the right variant.

1. The condition of scarcity:

a. cannot be eliminated.

b. prevails in poor economies.

c. prevails in rich economies.

d. all of the above.

e. none of the above.

2. The condition of scarcity can be eliminated if:

a. people satisfy needs rather than false wants.

b. sufficient new resources were discovered.

c. output of goods and services were increased.

d. all of the above.

e. none of the above.

3. The subject of economics is primarily the study of:

a. the government decision-making process.

b. how to operate a business successfully.

c. decision-making because of the problem of scarcity.

d. how to make money in the stock market.

4. Which of the following is included in the study of macroeconomics?

a. Salaries of college professors.

b. Computer prices.

c. Unemployment in the nation.

d. Silver prices.

5. Microeconomics approaches the study of economics from the viewpoint of:

a. individual or specific markets.

b. the national economy.

c. government units.

d. economy-wide markets.

 

Text 2

As you read the text, underline the main ideas and supporting information in reference to opportunity cost.

Opportunity Cost

Do you have things you want? Probably not. Very few people ever reach the stage where they have everything they want. In fact, one want often leads to another. It is important to point out however, that there is a difference between wants and needs. Everyone needs food, clothing and shelter but other so-called “needs” are really “wants”. For example, you may insist that you need a car but you may live in an area where you really don’t have to have one. You can walk, bicycle, or rely on public transportation to get around. Similarly, you may want new clothes, but whether or not you need them is a value judgement. If you think about it, you probably will agree that most people's needs are limited. In contrast, people's wants are unlimited.

Because of the problem of scarcity nations, businesses, and individuals all must make choices in an effort to satisfy unlimited wants with limited resources. These choices are not always easy. Suppose you have saved some money and are thinking of buying a new bicycle. Before buying the bicycle, however, you may give some consideration to the possibility of buying something else instead. Would a stereo system give you more pleasure than the bicycle? What about the possibility of buying a used bike so you will have enough money left over to buy the new shoes you need or to put some money aside for college? Or would it be better to save the money toward a down payment on a used car that you can use on your part-time job as well as at college? Because your income is limited and you can buy only a limited number of things, you probably will give considerable thought to the situation before making your purchase.

However you decide to use your money you will have to give up the opportunity to purchase something else that also may have given you pleasure. If you decide to purchase the second-hand bicycle so that you will have some money to put aside for college, you will have to give up the opportunity to buy the stereo system or to buy the new bicycle. Economists use the term opportunity cost to refer to the next best alternative that is given up when a decision is made to use resources in a particular way. In this example, if your second choice would have been the purchase of a stereo system, then the opportunity cost of buying the used bicycle and putting aside the money for college is the stereo system you could have had.

Money is not the only scarce resource that individuals have. Time is also a scarce resource. Suppose that on a particular Saturday night you have the opportunity to go out on a date with a person you like very much. At the same time, you also have the opportunity to go roller-skating with several of your friends. Because you can't do both you must make a choice. No matter which choice you make, you are going to pay a price in terms of the opportunity cost of your decision. If you decide to go out on the date the opportunity cost of your choice is giving up the opportunity to go roller skating. If you decide to go roller skating, the opportunity cost of that decision is giving up the opportunity to go out on the date.

Nations, too, are constantly faced with the realities of opportunity costs. For example, the government must decide how much it will spend for national defence and how much will be spent on non-defence programs, such as education, transportation, and other public services. Since the government has a limited amount of money, a decision to spend more money on national defence usually will require funding for non-defence programs to be cut. Thus, the opportunity cost of the increased defence spending is the reduction of funding of non-defence programs.

 

Ex. 1. Choose the best answer to the following questions, using the text.

1. Why is scarcity the most basic of all economic problems?

a. because the federal government must decide how much it will spend for natural defence.

b. it gives you an opportunity to buy something else.

c. because it is the most important issue in balancing unlimited needs with limited resources.

2. What is meant by the term “opportunity cost”?

a. it is your limited income.

b. it is defined as a decision to spend money.

c. it refers to the next best alternative that is given up when a decision is made to use resources in a particular way.

3. How do opportunity costs affect both individuals and nations?

a. a state must spend less money on education.

b. an individual has to give up something that gives him pleasure.

c. an individual or a nation has to sacrifice something for the choice made.

 

Ex. 2. Say if these statements are true or false.

1. Because of the problem of scarcity nations, businesses, and individuals all must make choices in an effort to satisfy unlimited wants with limited resources.

2. Economists use the term opportunity cost to refer to the next best alternative.

3. Any time you decide to use scarce resource in a particular way, you do not incur an opportunity cost – the cost of the next best alternative use of that resource.

4. Governments never have problems with defence spending.

 

Text 3

As you read the text, focus on the following terms: 1) economic goods; 2) economic services; 3) factors of production.

Satisfying People’s Wants

Economics is the study of how individuals and society choose to use limited resources in an effort to satisfy people’s unlimited wants. Satisfying such wants involves the production of economic goods and services. We will first define the terms “economic goods” and “economic services”, and then turn our attention to the factors of production needed to produce them.

Economic goods are things of value that you can see, and show to the others. They are things like bicycles, books, stereos, and clothing. Economic goods also include such things as factories, stores, machines, and tools.

Economic services are intangible things that have value but often cannot be seen, touched, or shown to others. Suppose you go bowling on Saturday night. At the bowling alley, you pay for the rental of a pair of bowling shoes and a bowling ball and for the privilege of bowling several games. You enjoy the evening immensely and consider the outing worth the money you spent. However, in terms of tangible purchases, you have nothing to show for your money. This is an example of an economic service. Other examples of economic services are medical care, legal advice, movies and national defence.

Factors of production which are also called productive resources, are the basic resources needed for the production of economic goods and services. Economists, traditionally, have divided the factors of production into three basic categories: (1) natural resources; (2) capital goods; (3) labour. In addition, many economists add a fourth factor of production, entrepreneurship to the list.

Natural resources are things provided by nature. Land, air, water, forests, coal, iron ore, oil, and other minerals are examples of natural resources. They are the starting points of all production, and they represent the most basic limitations of the productive capacity of an economy. In other words, no matter how much skilled labour and technological knowledge an economy has, it cannot create goods if it lacks natural resources.

Capital goods are human-made resources that are used for the production of other goods and services. Factories, machines, tools, railroads, trucks, and business buildings are all examples of capital goods.

It is important to distinguish between capital goods and consumer goods.

Consumer goods which are not a factor of production - are finished products sold to consumers for their own personal use. They include such things as food, clothing, TV sets, and newspapers. In contrast capital goods are things that are used in the production of consumer goods and services. A factory that manufactures TV sets is a capital good. Some things can be either consumer goods or capital goods, depending on how they are used. For example, an automobile purchased for personal use is a consumer good. However, automobiles purchased for use as taxis or for other business purposes are capital goods.

Labour, sometimes called human resources, is any form of human effort exerted in production. It includes all kinds of work. The work of a janitor, teacher, lawyer, engineer, and the governor of your state are all examples of labour. Labour is essential to production, since natural resources and capital goods are of no value unless they can be put to use.

The three facts of production described above - natural resources, capital goods and labour must be combined and organized before production can take place. This is where entrepreneurship, the fourth factor of production, enters the picture. Entrepreneurship may be defined as the function of combining and organizing natural resources, capital goods, and labour, assuming the risks of business failure, and providing the creativity and managerial skills necessary for production to take place. An entrepreneur is a person who carries out these tasks in the hope of making financial gains from the endeavour.

 

Ex. 1. Find the information in the text to answer the questions:

1. What is the difference between economic goods and economic services? Give examples to illustrate them.

2. What are the basic categories of the factors of production?

3. Are consumer goods considered to be factors of production too? What is the difference between consumer and capital goods?

4. How can you prove that labour is an essential factor of production?

5. Are there any other factors that influence production in modern world?

 

Ex. 2. Put down words and word combinations from the text you are going to use while giving its short summary.

 

WRITING

 

Scan the text and do the following tasks:

A.Choose the headline which best expresses the main idea of each paragraph:

– Economics Theory.

– Descriptive Economics.

– Economic Policy.

 

B. Reduce the text to one-fifth of its original length giving the most important information in writing.

Methodology

In studying any problem or segment of the economy, the economist must first gather the relevant facts. These facts must then be systematically arranged, interpreted, and generalized upon. These generalizations are useful not only in explaining economic behaviour, but also in predicting and therefore controlling future events.

……………

All sciences are empirical. All sciences are based upon facts, that is, upon observable and verifiable behaviour of certain data or subject matter. In the physical sciences the factual data are inorganic. As a social science, economics is concerned with the behaviour of individuals and institutions engaged in the production, exchange, and consumption of goods and services.

The first major step, then, in investigating a given problem or a specific segment of the economy is to gather the facts. This can be an infinitely complex task. The world of reality is cluttered with a myriad of interrelated facts. The economist therefore must use discretion in fact gathering. One must distinguish economic from non-economic facts and then determine which economic facts are relevant and which are irrelevant for the particular problem under consideration. But even when this sorting process has been completed, the relevant economic facts may appear diverse and unrelated.

……………

A conglomeration of facts is relatively useless; mere description is not enough. To be meaningful, facts must be systematically arranged, interpreted, and generalized upon. This is the task of economic theory or analysis. Principles and theories – the end result of economic analysis - bring order and meaning to a number of facts, by tying these facts together, putting them in correct relationship to one another, and generalizing upon them: "Theories without facts may be barren, but facts without theories are meaningless."

The interplay between the levels of fact and theory is rather complex. Principles and theories are meaningful statements drawn from facts but facts, in turn, serve as a constant check on the validity of principles already established. Facts - how individuals and institutions actually behave in producing, exchanging, and consuming goods and services change with time. This makes it essential that economists continuously check existing principles and theories against the changing economic environment.

……………

The creation of specific policies designed to achieve the broad economic goals of our society is no simple matter. A brief examination of the basic steps in policy formulation is in order.

1.The first step is to make a clear statement of goals. If we say that we have “full employment”, do we mean that everyone between, say, 16 and 65 years of age has a job? Or do we mean that everyone who wants to work has a job?

2.Next, we must state and recognize the possible effects of alternative policies designed to achieve the goal. This entails a clear-cut understanding economic impact, benefits, costs, and political feasibility of alternative programs. Thus, for example, economists currently debate the relative merits and demerits of fiscal policy (changing government spending and taxes) and monetary policy (altering the supply of money) as alternative means of achieving and maintaining full employment.

3.We are obligated to both ourselves and future generations to look back upon our experiences with chosen policies and evaluate their effectiveness; it is only through this type of evaluation that we can hope to improve policy applications. Did a given change in taxes or the supply of money alter the level of employment to the extent originally predicted? If not, why not?

 

TRANSLATION

 

A. Translate into Russian.

Economic Theory and Models

Economic theories simplify reality to allow us to understand basic economic forces and how individuals cope with the problems of scarcity. We can observe actions and their consequences. Observation and description are not sufficient for understanding and ultimately predicting actions. Theory establishes relationships between cause and effect. We use it to interpret actions and outcomes so we can explain the process by which the actions were undertaken and the outcomes achieved. The purpose of theory in all scientific analyses is to explain the causes of phenomena we observe. To conduct economic analyses we frequently need to engage in abstraction. This involves making assumptions about the economic environment and human motivation that simplify the real world enough to allow us to isolate forces of cause and effect. Any theory is a simplification of actual relationships.

An economic model is a simplified way of expressing how some sector of the economy functions. An economic model contains assumptions that establish relationships among economic variables. We use logic, graphs, or mathematics to determine the consequences of the assumptions. In this way we can use the model to make predictions about how a change in economic conditions results in changes in decisions affecting economic variables. Economists often use the term “model” as a synonym for theory.

 

B.Translate into English.

Экономика – это общественная наука, изучающая поведение в сферах производства, потребления, распределения и обмена. Экономисты анализируют происходящие в этих сферах процессы и исследуют их последствия для физических лиц, организаций, например фирм, и общества в целом. В экономической науке существует много конкурирующих между собой направлений, однако основным делением является деление на классическую и неоклассическую школы.

В систему экономических наук входят науки, которые изучают функциональные аспекты развития экономики (финансы и кредит, ценообразование, экономика труда, материально-техническое обеспечение, планирование экономического и социального развития и др.) или ее отраслевые особенности (экономики промышленности, сельского хозяйства, транспорта и др.).

 

LISTENING

 

Listen to the interview with Denis Mac Shane, a British Member of Parliament for the Labour Party and answer the following questions.

1. Why does MacShane think that manufacturing has a future?

2. Why does MacShane think that manufacturing has a future in the advanced countries?

3. Why, however, is this manufacturing unlikely to solve the problem of unemployment?

4. What does MacShane mean by “in theory there should be no more manufacturing in Switzerland?” (It is this theory that makes many people argue that manufacturing must move to “less-developed” countries.)

5. Why does he say it is surprising for a British company to be buying Swiss goods?

6. What is the reason he gives for the United States still being the richest nation in the world?

 

SPEAKING

 

 








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