Market Economy

READING SKILLS

Key Vocabulary

economic system	экономическая система	Russia was the first country to forge a new economic system under the banner of Marxism.
traditional economy	традиционная экономика	Meanwhile, the traditional economy stagnated.
subsistence	средства к существованию; пропитание	The standard of living today is on the edge of subsistence.
planned economy	плановая экономика	In a planned economy, business activities and the use of resources are decided by the government, and not by market forces. This is a centrally planned economy.
mixed economy	смешанная экономика	A mixed economy is an economic system in which some companies are owned by the state and some are not.
market economy	рыночная экономика	It is probably true that a market economy tends to suppress non-economically useful differences.
free market	свободный рынок	A free market is an economic system in which business organizations decide things such as prices and wages, and are not controlled by the government.
enterprise	предпринимательство	SYN: entrepreneurship Free enterprise is an economic system in which businesses compete for profit without much government control.

Ø Scan the text to find the main features of the market economy.

Ø List the advantages and disadvantages of the system.

Ø Sum up the main idea.

Ø Compare the classification given in the text below and the one above.

u

There is a connection between political ideology and economic systems. We can identify four broad types of economic systems – a market economy, a command economy, a mixed economy, and a state-directed economy.

In a pure market economy all productive activities are privately owned, as opposed to being owned by the state. The goods and services that a country produces, and the quantity in which they are produced, are not planned by anyone. Rather, production is determined by the interaction of supply and demand and signaled to producers through the price system. If demand for a product exceeds supply, prices will rise, signaling producers to produce more. If supply exceeds demand, prices will fall, signaling producers to produce less. In this system consumers are sovereign. The purchasing patterns of consumers, as signaled to producers through the mechanism of the price system, determine what is produced and in what quantity.

For a market to work in this manner there must be no restrictions on supply. A restriction on supply occurs when a market is monopolized by a single firm. In such circumstances, rather than increase output in response to increased demand, a monopolist might restrict output and let prices rise. This allows the monopolist to take a greater profit margin on each unit it sells. Although this is good for the monopolist, it is bad for the consumer, who has to pay higher prices. Moreover, it is probably bad for the welfare of society. Since, by definition, a monopolist has no competitors, it has no incentive to search for ways of lowering its production costs. Rather, it can simply pass on cost increases to consumers in the form of higher prices. The net result is that the monopolist is likely to become increasingly inefficient, producing high-priced, low-quality goods, while society suffers as a consequence.

Given the dangers inherent in monopoly, the role of government in a market economy is to encourage vigorous competition between private producers. Governments do this by outlawing monopolies and restrictive business practices designed to monopolize a market (antitrust laws serve this function in the United States). Private ownership also encourages vigorous competition and economic efficiency. Private ownership ensures that entrepreneurs have a right to the profits generated by their own efforts. This gives entrepreneurs an incentive to search for better ways of serving consumer needs. That may be through introducing new products, by developing more efficient production processes, by better marketing and after-sale service, or simply through managing their businesses more efficiently than their competitors. In turn, the constant improvement in product and process that results from such an incentive has been argued to have a major positive impact on economic growth and development.

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