The price elasticity of demand

Pre-reading tasks

Task 1

Practice the reading of the following words:

measure ['meʒə] key [ki:] revenue ['revənju:] ensure [ɪn'ʃɔ:] reconcile ['rekǝnsaɪl] associated [ə'səυʃɪeɪtɪd]

admission [əd'mɪʃn] quantity ['kwɒntətɪ] responsive [rɪ'spɒnsɪv] percentage [pə'sentɪdʒ] luxury ['lʌkʃǝrɪ]

adjustment [ə'dʒʌstmənt] multiply ['mʌltɪplaɪ horizontal [̗hɒrɪ'zɒntl] distinguish [dɪ'stɪŋɡwɪʃ] inferior [ɪn'fɪərɪə] frequent['fri:kwənt]

Task 2

Make sure you can read these words correctly and say what words in the Russian language help you (to) guess their meaning:

sensitivity; season; lead; reduce; examine; elasticity; effect; horizontally; normal; cotton; idea; constant

Task 3

Give the initial forms of the following words:

demanded; cooking; incomes; definitions; has; more; typically; owner; could; grows; multiplied

Task 4

Learn to recognize the following international words:

problem; investors; result; start; moment; total; budget; positive; zero; components; strategy; inflation

Task 5

Read and translate the following words paying attention to the stress displacement:

elastic - elasticity; reduce - reduction; consumer - consumption; define - definition; type - typically; possible - possibility; necessary - necessity; capable - capability; assume - assumption

Text A

The price elasticity of demand

Task 6

Read the text and be ready to do the exercises.

The concept of the price elasticity of demand is a measure of the sensitivity of the quantity demanded to the price. The price elasticity of demand is a key piece of information in many economic prob­lems such as the pricing decision. It is a measure of how consumers react to a change in price. In economics and business studies, the price elasticity of demand is a measure of the sensitivity of quantity demanded to changes in price. It is measured as elasticity, that is it measures the relationship as the ratio of percentage changes between quantity demanded of a good and changes in its price.

In simpler words, demand for a product can be said to be very inelastic if consumers will pay almost any price for the product, and very elastic if consumers will only pay a certain price, or a narrow range of prices, for the product. Inelastic demand means a producer can raise prices without much hurting demand for its product, and elastic demand means that consumers are sensitive to the price at which a product is sold and will not buy it if the price rises by what they consider too much.

The price elasticity of demand is the percentage change in the quantity of a good demanded divided by the corresponding percentage change in its price.

The price elasticity of demand tells us about movements along a demand curve and the demand elasticity must be a negative number.

The Long Run and the Short Run

The price elasticity of demand for a good is not independent of the length of time that consumers have to adjust their spending patterns when prices change. The price elasticity of demand is lower in the short run than in the long run when there is more scope for substitution of other goods. This result is very general.

How Long is the Long Run?

The long run is the period necessary for complete adjustments to a price change. Its length depends on the type of adjustments consumers wish to make. Demand responses to a change in the price of chocolate should be completed within a few months, but full adjustment to changes in the price of oil or cigarettes may take several years. The short run refers to the period immediately after prices change and before long-term adjustment can occur.

The income elasticity of demand for a good is the percentage change in quantity demanded divided by the corresponding percentage change in income.

Normal, Inferior, and Luxury Goods

We distinguish normal goods, for which demand increases as income rises, and inferior goods, for which demand falls as income rises. We can now define normal and inferior goods in terms of their income elasticity of demand.

A normal good has a positive income elasticity of demand. An inferior good has a negative income elasticity of demand.

It is also useful to distinguish luxury goods and necessities.

A luxury good has an income elasticity that is larger than one. A necessity has an income elasticity that is less than one.

All inferior goods are necessities, since their income elasticity of demand are negative. However, necessities also include normal goods whose income elasticity of demand lies between zero and one.

Luxury goods tend to be high-quality goods for which there exists lower-quality, but quite adequate, substitutes: Mercedes cars rather than small Fords, foreign rather than domestic holidays.

Goods cost twice as much but incomes are twice as high. If meat used to cost twice as much as bread it still costs twice as much. In fact, nothing at all has really changed. Demand behavior will be unaltered by a doubling of the nominal value of all prices and all forms of income.

In examining economic data we can pursue one of two strategies. The first is to undertake a complete econometric analysis which is capable of simultaneously capturing the three distinct effects. However, a simpler strategy will sometimes suffice. Let us think again about the definition of elasticity. If we hold income and the price of all other goods constant, the own price elasticity tells us the effect of changes in the price of a good that affect its real or relative price compared with other goods. Similarly, holding constant the prices of all goods, the income elasticity tells us the effect of changes in money income that affect its real purchasing power, the quantity of goods that it will purchase. The definitions of elasticity make sense not because they refer to nominal variables but because their 'other things equal' assumptions make nominal and real changes coincide. Own price and cross price elasticity tell us about the effects of changes in real or relative prices. Income elasticity tell us about the effects of changes in real income.

With this insight, we can see how to amend our analysis to handle economies that are experiencing inflation, where the nominal values of most prices and incomes are rising over time. We can see now why doubling all prices has no effect on demand: it affects neither real income nor relative prices. We can also see how it may be possible to examine data in a simple way without resorting to a full econometric analysis. If an economy is experiencing inflation, prices are certainly changing.

Task 7

Choose the correct preposition

1. Our sales have been down ever _____the bad news came out last year.

from

out

since

2. _______ the past year, our profits have tripled.

a) During

b) Over

c) In

3. We have to increase our budget to a minimum _____10% of our gross sales.

a) no preposition

b) on c) of

4. The inflation rate is going up as a result _______ rising gas and energy costs.

a) on

b) in

c) of

5. This is well _____ the target of 4% that we were aiming for.

a) above

b) up

c) to

6. They still haven't figured ____ a way to improve employee morale.

a) up

b) out

c) through

7. We will have to cut production _____50,000 units.

a) by

b) in

c) with

8. Which office do you work _____?

a) no preposition

b) at

c) with

9. We have to divide the work load evenly _____ all the employees.

a) among

b) between

c) to

10. Gross profits ______all the expenses involved in running a business.

a) before

b) below

c) minus

11. We are committed _____retaining our status as market-leader.

a) of

b) to

c) in

Task 8

Match a line in A with a line in B (as in the text)

A	B
adequate to change luxury to remain real reduction nominal to reduce type of piece	consumption value of information adjustment income price goods substitutes in price unaltered

Task 9

Match the definitions:

to research reduction to undertake to reconcile assertion simultaneously

1. to reestablish a close relationship between. 2. something declared or stated positively, often with no support or attempt at proof. 3. to study (something) thoroughly so as to present in a detailed, accurate manner 4. at the same time 5. the amount by which something is lessened or diminished 6. to take upon oneself; decide or agree to

Task 10

Find the Russian equivalents to the following English words and word combinations

to adjust spending change in price absolute decline in demand pricing decision the budget share of inferior goods total consumer spending constant price empirical research whatever the price 10. unaltered demand behavior

полные потребительские расходы оценка решения безотносительно цены доля бюджета низших товаров неизменное поведение требования приспосабливать расходы эмпирическое исследование постоянная цена изменение в цене j) абсолютное пользующееся большим спросом снижение

Task 11

Match up the words which have an opposite meaning

to adjust to warn to demand to alter gradually constant spending to satisfy to reduce 10. to suggest

abruptly savings to disappoint to keep secret to increase to preserve to demand to confuse varying j) to grant

Task 12

Match up the words which have a similar meaning

result to compensate price shortly to amend aim to occur assumptions number 10. elasticity

expense to change amount desire flexibility expectation before long to take place i) to reward j) to be equivalent

Task 13

Give the Russian equivalents to the following:

sole aim; small reductions; sensible pricing decision; to expand economy; demand responses; fraction of total spending; to remain unaltered; high quality goods; previously purchased; distinct effects

Task 14

Form the necessary parts of speech

VERB	NOUN		VERB	NOUN
reduce	---		define	---
require	---		---	dependence
---	measurement		differ	---
suggest	---		correspond	---
introduce	---		---	definition
refer	---		change	---
---	substitution		compare	---
adjust	---		decide	---
exist	---		---	reduction
---	comparison
assume	---

ADJECTIVE

---

---

---

---

---

---

---

---

---

NOUN	ADJECTIVE
sense	---
---	interesting
---	elastic
---	necessary
variety	---
capability	---
relative	---
strategy	---
value	---

Task 15

Form the new words by using the following suffixes and prefixes:

-less; -er; -ment; -e(a)nce; -sion; -able; -ation; un-; in-; -ity; -tion; im-

divide; elastic; measure; necessary; price; depend; different; complete; possible; change; consume; examine; adequate; dependent

Task 16

Read and translate the following sentences paying attention to the meaning of the words and word combinations given below:

a) to afford -позволить себе, иметь возможность

1. I think we can afford the extra hour it will take.

2. We can only afford to buy a small car at the moment

3. The question is not whether we can afford to invest in every child; it is whether we can afford not to.( Marian Wright Edelman)

4. I can't afford to spend two hours with this person.

5. We can't afford to send our children to college.

6. Can you afford this car?

b) whatever - какой бы ни, любой

1. Whatever choice you make, there will be consequences.

2. I'll do whatever I can.

3. Do you want Chinese or Mexican for lunch today? — Whatever.

4. Whatever you are be a good one.( Abraham Lincoln)

с) to adjust - приводить в порядок, приспосабливать

1. We must adjust to the bad economic situation

2. Adjust your eyes to the darkness

3. The registered PCT populations on the database have not been adjusted for list inflation.

4. The decisions of this commission would be published monthly, and payments would be adjusted in accordance with them.

5. At the end of that year, entitlements are adjusted to reflect actual income

6. Alternatively you can, of course, manually adjust the size of the text with your web browser.

d) to match - сочетать, подходить, соответствовать; спичка; ровня, пара

1. My local team are playing in a match against their arch-rivals today

2. He knew he had met his match.

3. They found out about his color-blindness when he couldn't match socks properly.

4. She matched him at every turn: anything he could do, she could do as well or better

5. Matchmaker, can you match my daughter with a nice young man?

6. The suspect's fingerprints don’t match those on the gun.

e) conversely - наоборот, противоположно

1. I never desire to converse with a man who has written more than he has read. — Samuel Johnson (1709-1784).

2. Because change itself would absolutely stay-stable, and again, conversely, stability itself would change, if each of them encroached on the other.

3. In these cases the market has sufficient skepticism as to the continuation of the unusually high profits to value them conservatively, and conversely when earnings are low or nonexistent.

а) to handle - регулировать, улаживать, управлять, делать руками;

handle - общая сумма, кассовый сбор

1. The daily handle of a Las Vegas casino is typically millions of dollars.

2. The hardness of the winters forces the breeders to house and handle their colts six months every year.

3. You shall see how I'll handle her. (Shakespeare, Measure for Measure)

4. We will handle what persons are apt to envy others.

5. That fellow handles his bow like a crow keeper. (Shakespeare, King Lear)

Task 17

Translate into English

1. Рынок ценных бумаг, как и любой рынок вообще, где совершаются сделки, представляет собой механизм (структуру), посредством которого цены регулируют распределение ограниченных ресурсов в обществе.

2. Построенная (начерченная) кривая спроса отображает воздействие цен и доходов на количественные показатели (величину) спроса. Нисходящая кривая показывает рост спроса по мере снижения цен.

3. Незначительное снижение цены какого-либо товара мало влияет на величину спроса на этот товар.

4. Бизнес на Лондонской фондовой бирже был активен, и во второй половине дня было продано много ценных бумаг.

5. Бюджет - это главный финансовый инструмент страны. Это план, прогноз, оценка доходов и расходов, как правило, на один год. Правительство должно тщательно распределять свои ресурсы и точно прогнозировать свои доходы.

6. Эластичность спроса по цене показывает, на сколько процентов изменится величина спроса при изменении цены на 1%. На эластичность спроса влияют многие факторы.

7. Если запланированные доходы бюджета превышают расходы бюджета, то это называется бюджетный профици́т (или профицит бюджета - budget surplus). Если запланированные расходы бюджета превышают доходы бюджета, то это называется бюджетный дефици́т (или дефицит бюджета - budget deficit). Когда при исполнении бюджета уровень дефицита бюджета превышает установленный при утверждении бюджета показатель, или происходит значительное снижение ожидавшихся доходов бюджета, то представительный орган власти (на основе предложений органа исполнительной власти) принимает решение о введении установленного законом механизма уменьшения расходов. Такое «урезание» запланированных бюджетом расходов называется секве́стр (sequester).

8. Бюджетная система страны представляет собой сложный механизм, характеризующий особенности взаимоотношений государства и местных органов власти. Структура бюджета страны зависит от её государственного устройства. Как правило, она состоит из государственного (федерального) и местных (региональных) бюджетов. В странах с федеративным государственным устройством (США, Германия) имеются промежуточные звенья - бюджеты штатов, земель и соответствующих им административных образований

9. Различают обыкновенные и привилегированные акции. Обыкновенные акции дают право на участие в управлении обществом (1 акция соответствует одному голосу на собрании акционеров, за исключением проведения кумулятивного голосования) и участвуют в распределении прибыли акционерного общества. Источником выплаты дивидендов по обыкновенным акциям является чистая прибыль общества. Размер дивидендов определяется советом директоров предприятия и рекомендуется общему собранию акционеров, которое может только уменьшить размер дивидендов относительно рекомендованного советом директоров.

10. Привилегированные акции могут вносить ограничения на участие в управлении, а также могут давать дополнительные права в управлении (не обязательно), но приносят постоянные дивиденды (часто — фиксированные в виде определенной доли от бухгалтерской чистой прибыли или в абсолютном денежном выражении). Как правило, в России существуют значительные ограничения на участие в управлении компаниями, что вызвано тем, что массовая приватизация предприятий согласно 2 и 3 типу предусматривала передачу Привилегированных акций трудовому коллективу, при этом лишая его права голоса на собраниях акционеров.

Task 18

Answer the following questions:

1. What is the function of the price elasticity of demand?

2. How does the demand for one thing depend on the price of related goods? Give example(s).

3. How do we calculate the price elasticity of demand?

4. When is demand elastic?

5. What does the price elasticity of demand for a good depend on?

6. What is the Long Run and how long is it?

7. How do we calculate the income elasticity of demand?

8. What are the types of goods?

9. What is the difference between goods?

10. What happens to budget shares when incomes change?

11. What happens to demand/price/cost when incomes change?

12. Is it possible to hold the prices constant?

Text B

BUDGET

Task 19

Read the text to yourself and be ready for a comprehension check-up

What Does Budget Mean?

An estimation of the revenue and expenses over a specified future period of time. A budget can be made for a person, family, group of people, business, government, country, multinational organization or just about anything else that makes and spends money. A budget is a  microeconomic concept that shows the tradeoff made when one good is exchanged for another.

A surplus budget means profits are anticipated, while a balanced budget mean that revenues are expected to equal expenses. A deficit budget means expenses will exceed revenues. Budgets are usually compiled and re-evaluated on a periodic basis. Adjustments are made to budgets based on the goals of the budgeting organization. In some cases, budget makers are happy to operate at a deficit, while in other cases, operating at a deficit is seen as financially irresponsible.

SHARES

What Does Shares Mean?

A unit of ownership interest in a corporation or financial asset. While owning shares in a business does not mean that the shareholder has direct control over the business's day-to-day operations, being a shareholder does entitle the possessor to an equal distribution in any profits, if any are declared in the form of dividends. The two main types of shares are common shares and preferred shares. In the past, shareholders received a physical paper stock certificate that indicated that they owned "x" shares in a company. Today, brokerages have electronic records that show ownership details. Owning a "paperless" share makes conducting trades a simpler and more streamlined process, which is a far cry from the days were stock certificates needed to be taken to a brokerage before a trade could be conducted. 

While shares are often used to refer to the stock of a corporation, shares can also represent ownership of other classes of financial assets, such as mutual funds.

A-SHARES

What Does A-Shares Mean?

Shares in mainland China-based companies that trade on Chinese stock exchanges such as the Shanghai Stock Exchange and the Shenzhen Stock Exchange. A-shares are generally only available for purchase by mainland citizens; foreign investment is only allowed through a tightly-regulated structure known as the Qualified Foreign Institutional Investor (QFII) system.   Most companies listed on Chinese exchanges will offer two shares classes: A-shares and B-shares. B-shares are quoted in foreign currencies (such as the U.S. dollar) and are open to both domestic and foreign investment (provided that locals set up a foreign currency account), while A-shares are only quoted in Chinese renminbi (1)

A-shares experienced explosive growth in the 2005-2007 period as restrictions preventing investment by Chinese citizens slowly began to peel away. In fact, demand was so high for A-shares that they would trade for much higher valuations than what the same stock could be purchased for on a different exchange.  

The Peoples’ Republic of China is working to blend the two classes of stock together, and eventually allow direct foreign investment in mainland companies.  It is one of many major financial reforms that the advanced economies of the world hope will occur in the next several years; there is a tremendous amount of pent-up demand for Chinese equity, provided that regulations become uniform and reporting requirements are in-line with global standards.   

B-SHARES

What Does B-Shares Mean?

Shares in companies based in mainland China that trade on either the Shanghai or Shenzhen stock exchanges. B-Shares are eligible for foreign investment provided the investment account is in the proper currency (Shanghai B-shares trade in U.S. dollars, while Shenzhen B-shares trade in Hong Kong dollars). 

B-shares trade alongside A-shares in the Chinese companies on the mainland exchanges. Changes in government regulation have allowed Chinese citizens to invest in both A-shares and B-shares after previously limiting investment to only the A-shares.

B-shares are typically what a mutual fund or exchange-traded fund that invests in China will hold, along with H-shares from the Hong Kong Exchange and N-shares, which trade on the New York Stock Exchange.  

As part of a long-term effort to open up China's economy, plans are in place for the two share types to be combined in the future to allow for more uniform investment policies; if and when this occurs it should encourage more outside investment in the world's most populous country.

Comments: (1)

The Renminbi (RMB)) is the official currency of the People's Republic of China. Renminbi is legal tender in mainland China, but not in Hong Kong or Macau Its name means "people's currency".

Task 20

Copy out the dominant noun/verb/adjective for each part and find the words associated with them in meaning.

Task 21

Read each paragraph and find the sentence(s) that reveal(s) the idea of the title

Task 22

Copy out the topic sentence in each paragraph.

Task 23

State the meaning of the words while and as at the beginning of the sentence.

Task 24

Single out words and expressions connected with shares.

Task 25

Give answers (2-3 sentences) to the questions in the titles.

Task 26

Say what you have learnt from the text about types of shares.

Task 27

Recognize the difference between A-shares and B-shares.

Task 28

By comparing the words with -ed ending, state if it is past Simple or Past Participle.

Task 29

Answer the questions:

1. What is budget?

2. What are the types of budget?

3. What does a share mean?

4. What are the types of shares?

5. Who can get shares and how many?

6. What is the difference between A-shares and B-shares?

7. Does financial reform influence shares?

8. Are there (if any) restrictions to get shares?

9. Budget makers prefer to operate at a deficit. Give pros and cons.

10. What is the difference between a surplus budget and a balanced budget?

Task 30

Make a plan to retell the text.

Task 31

Write a brief summary of the text. Use the following:

Words that can be used to compare things	Words that can be used to contrast things
in the same way similarly likewise like as also	but however otherwise yet although still on the other hand even though

Task 32

Points for discussion:

1. What is the common denominator for stating the prices of all goods and services?

2. Give the definition of the price elasticity of demand. Explain it in your own words.

3. How is price determined by demand and supply?

4. What causes price to change?

5. What elasticity, other than own price, would be useful for a corporate economist? In what situations would you use elasticity?

UNIT 6

Invest a few moments in thinking.  It will

pay good interest.  (Unknown)

You get recessions, you have stock market declines. If

you don't understand that's going to happen, then you're

not ready, you won't do well in the markets. (Peter Lynch)