This exercise is from English, Economics & Management, a book which  is an adaptation by Prof Rajiva Wijesinha of the original volume by Gartney and Stroup that presented basic economic principles simply. The principles are essentially liberal, but their universality will be clear in the context of the development of social and economic theories all over the world in the last few decades. 

 

I am grateful to Michael Walker of the Canadian Fraser Institute for encouraging me to use this text for English Teaching. The book should be used in conjunction with A Handbook of English Grammar (Foundation Books, Cambridge University Press, India). The full text of English, Economics & Management, as well as other  English books and materials that can be downloaded to enhance your English knowledge, can be found on the website of the Liberal Party of Sri Lanka. 

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Economists believe that changes in incentives influence human behaviour in a manner we can foretell. Benefits and costs that affect us influence our choices. If any choice gives us more benefits, we are more likely to choose it. Conversely, if a choice costs us more, we are less likely to choose it.

This basic belief of economics is a powerful tool because we can apply it widely. Incentives affect behaviour in almost all aspects of our lives, ranging from what we buy, what we decide to do at home, how we choose our governments.

When we buy things, the basic economic belief is that, if the price of something increases, consumers will buy less of it; producers, on the other hand, will supply more of it since the price increase makes it more profitable for them to produce the good. Both buyers and sellers respond to incentives. Market prices will bring their actions into a balance. If the amount which people want to buy is more than the amount sellers are willing to provide, the price will rise. The higher price will discourage consumption and encourage more production of the good or service. This will bring the amount demanded and the amount supplied into balance.

Alternatively, if consumers do not wish to buy the current output of a good, stocks will accumulate and there will be downward pressure on the price. In turn, the lower price will encourage consumption and slow down production until the amount demanded by consumers once again balances the production of the good. Markets work because both buyers and sellers alter their behaviour according to changes in incentives.

Of course, this process does not work immediately. It will take time for buyers to respond fully to a change in price. In the same way, it will take time for producers to produce more in response to a price increase or to reduce production if price declines. Still, the effect is clear – market prices will coordinate the actions of both buyers and sellers and will bring them into harmony.

The response of buyers and sellers to the higher petrol prices of the 1970s in America illustrated the importance of incentives. As petrol prices rose, consumers cut down on less necessary trips and tried to travel together in cars. Gradually, they changed to smaller, more fuel-efficient cars in order to reduce the amount of petrol they used. At the same time, petrol suppliers increased their drilling to find new wells, they used a water flooding technique to get more oil from existing wells, and they also looked more intensely for new oil fields. By the early 1980s, this combination of factors put downward pressure on the price of crude oil.

Incentives also influence political choices. The person who shops in a market is the same person who shops among political alternatives. In most cases, voters are more likely to support political candidates and policies that provide them with a greater amount of personal benefits. Conversely, they will tend to oppose political programmes where the personal costs are high in relation to the benefits provided.

The basic view of economics—that incentives matter—applies as much in socialism as it does under capitalism. For example, in the former Soviet Union, managers and employees of glass plants were at one time rewarded according to the tons of sheet glass produced. Not surprisingly, most plants produced sheet glass so thick that you could hardly see through it. The rules were changed so that the managers were rewarded according to the square meters of glass produced. The results were predictable. Under the new rules, Soviet firms produced glass so thin that it was easily broken. You can see then that changes in incentives influence actions under all forms of economic organization.

Some opponents of this view have said that this sort of economic analysis only helps to explain the actions of selfish and greedy people. But this is not correct. People act for a variety of reasons, some selfish and some humanitarian. The basic idea of economics mentioned above applies to both these types of reason. The choices of all people will be influenced by changes in personal costs and benefits. For example, both the selfish person and the less selfish one will be more likely to try to rescue a small child in trouble in a shallow stream than in a roaring river. Similarly, both are more likely to give a needy person their old clothes rather than new ones. Incentives influence the choices of both.

 Questions

Grammar and Sentence Structure

  1. Identify the nouns and adjectives in paragraphs four to six. Use five of each of them in sentences of your own to bring out their meaning.
  2. Rewrite paragraph five in the present tense and paragraph six in the past tense.
  3. Identify the pronouns in the third paragraph and say to what each of them refers.
  4. Identify the prepositions in the last paragraph and use them in sentences of your own.

Vocabulary

  1. In groups, work out from their context the meanings of the highlighted words, and use them in sentences of your own.
  2. Find words or phrases in the last five paragraphs of this passage that are used to convey meanings similar to the following -Affected, In the same way, Different choices, Goes down, Little by little, could easily be guessed, Reduced, Method, React, With greater concern.
  3. Use both the words or phrases in the passage, as well as those given here, in sentences of your own.
  4. Form verbs from the italicized nouns and use them in sentences of your own.

 Comprehension

  1. What is the point of the examples given in the one before the last paragraph? If you were in charge of glass production in the former Soviet Union, what would you have decided to do?
  2. What is the point of the examples given in the last paragraph? Do you agree with this?
  3. Summarize the main argument of this passage in not more than five sentences.
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