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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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Voluntary exchange is productive because it promotes social cooperation and helps us get more of what we want. However, exchange is also costly. The time, effort, and other resources necessary to search out, negotiate, and conclude an exchange are called transaction costs. Transaction costs are an obstacle to the creation of wealth. They limit both our productive capacity and the realization of gains from mutually advantageous trading.
Transaction costs are sometimes high because of physical obstacles, such as oceans, rivers, marshes, and mountains. In these cases, investment in roads and improvements in transportation and communications can reduce the costs. In other instances, transaction costs may be high because of man-made obstacles, such as taxes, licensing requirements, government regulations, price controls, tariffs, or quotas. But regardless of whether the road-blocks are physical or man-made, high transaction costs reduce the potential gains from trade. Conversely, reductions in transaction costs increase the gains from trade and thereby promote economic progress.
People who provide trading partners with information and services that help them arrange trades and make better choices are providing something valuable. Such specialists or middle-men include real estate agents, stockbrokers, automobile dealers, publishers of classified ads, and a wide variety of merchants. Often, people believe that middlemen are unnecessary—that they merely increase the price of goods without providing benefits to either the buyer or the seller. Once we recognize that transaction costs are an obstacle to trade, it is easy to see that this view is wrong.
Consider the grocer who, in essence, provides middleman services that make it cheaper and more convenient for producers and consumers of food products to deal with each other. Think of the time and effort that would be involved in preparing even a single meal if shoppers had to deal directly with farmers when buying fruits or vegetables, or with fishermen if they wanted to serve fish.
Grocers make these contacts for consumers, arrange for the transport and sell all the items in a convenient shopping location, and maintain reliable inventories. The services of grocers and other middlemen reduce transaction costs and make it easier for potential buyers and sellers to realize gains from trade. These services increase the volume of trade and thereby promote economic progress.
Questions
Grammar and Sentence Structure
- Rewrite the first three paragraphs in the past tense. Remember that you do not need to change the tense of verbs that are used in apposition.
- Identify the main verbs of every clause in the first three paragraphs, ie the verbs of which you changed the tense. Also identify the complements of the linking verbs and the objects of the transitive verbs.
- Identify the relative clauses in the third and fourth paragraphs, and the pronouns that link them to other clauses. To what do those pronouns refer?
- Identify the prepositions in the last two paragraphs and use them in sentences of your own.
Vocabulary
- Give in your own words the meanings of the highlighted words. Find nouns and verbs related to these (more than one each where possible), and use them in sentences of your own.
- Find five nouns in this passage that are used as adjectives. Find verbs related to at least three of these and use them in sentences of your own.
- Find words that are similar in meaning to the italicized verbs. Find nouns that are related to these and use them in sentences of your own.
Comprehension
- What are the two types of transaction costs mentioned? How can these be reduced?
- How do middlemen reduce transaction costs?
- Can you think of how you have benefited recently from the services of a middleman, apart from a grocer?
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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Mutual gain is the foundation of trade. Parties agree to an exchange because they anticipate that it will improve their well-being. The motivation for market exchange is summed up in the phrase, “If you do something good for me, I will do something good for you.” Trade is productive; it permits each of the trading partners to get more of what they want.
There are three major reasons why trade is productive—why it increases the wealth of people. First, trade channels goods and services to those who value them most. A good or service does not have value just because it exists. Material things are not wealth until they are in the hands of someone who values them. The preferences, knowledge, and goals of people vary widely. Thus, a good that is virtually worthless to one may be a precious gem to another.
For example, a highly technical book on electronics that is of no value to an art collector may be worth thousands of rupees to an engineer. Similarly, a painting that is unappreciated by an engineer may be an object of great value to an art collector. Therefore, a voluntary exchange that moves the electronics book to the engineer and the painting to the art collector will increase the value of both goods. At the same time, the exchange will increase the wealth of both trading partners and the nation because it moves goods from people who value them less to people who value them more.
Second, exchange permits trading partners to gain from specializing in the production of those things they do best. Specialization allows us to expand total output. A group of individuals, regions, or nations will be able to produce a larger output when each specializes in the production of goods and services it can provide at a low cost, and uses their sales revenue to trade for desired goods it can provide only at a high cost. Economists refer to this principle as the law of comparative advantage.
In many ways, gains from trade and specialization are common sense. Examples abound. Trade permits a skilled carpenter to specialize in the production of frame housing while trading the earnings from housing sales to purchase food, clothing, automobiles, and thousands of other goods that the carpenter is not so skilled at producing. Similarly, trade allows Canadian farmers to specialize in the production of wheat and use the revenue from wheat sales to buy Brazilian coffee, a commodity that the Canadians could produce only at a high cost. Simultaneously, it is cheaper for Brazilians to use their resources to grow coffee and use the revenue from this to buy what they need.
Modern production of a good like a pencil or an automobile often involves specialization, division of labour, large-scale production methods, and the cooperation of literally tens of thousands of people. Gains from these sources of production are dependent upon exchange.
Third, voluntary exchange permits us to realize gains derived from cooperative effort, division of labour, and the adoption of large-scale production methods. In the absence of exchange, productive activity would be limited to the individual household. Self-sufficiency and small-scale production would be the rule. Exchange permits us to have a much wider market for our output, and thus enables us to separate production processes into a series of specific operations in order to plan for large production runs. Such actions often lead to enormous increases in output per worker.
Adam Smith, the “father of economics,” stressed the importance of gains from the division of labour more than 200 years ago. Observing the operation of a pin manufacturer, Smith noted that the production of the pins was broken into “about eighteen distinct operations,” each performed by specific workers. When the workers each specialized in a productive function, they were able to produce 4,800 pins per worker each day. Without specialization and division of labour, Smith doubted an individual worker would have been able to produce even 20 pins per day.
Specialization permits individuals to take advantage of the diversity in their abilities and skills. It also enables employers to assign tasks to the workers who are more able to accomplish them. Even more importantly, the division of labour lets us adopt complex, large-scale production techniques unthinkable for an individual household. Without exchange, however, the gains from these would be lost.
Questions
Grammar and Sentence Structure
- Rewrite the last paragraph in the past tense, and the one before the last paragraph in the present tense, leaving out the time marker in the first sentence.
- Identify to what the italicized pronouns in the fourth and last paragraphs refer.
- Identify the prepositions in the first three paragraphs and use them in sentences of your own.
- Identify the sentences in the last three paragraphs and say whether they are compound or complex. Are there any sentences, here or elsewhere in the passage, that use relative pronouns? Divide them into simple sentences.
Vocabulary
- Work out from their context the meanings of the highlighted words, and use them in sentences of your own.
- Divide the words that are underlined into nouns and adjectives. Find words that mean the opposite of these (nouns for nouns and adjectives for adjectives), and use them in sentences of your own.
- Find words or phrases in this passage that are used to convey meanings similar to the following – Give, allows, do, move, differ, great, separate, emphasized, difference, looking at
Comprehension
- What are the three reasons given for trade being productive? Explain each reason in your own words.
- Identify the examples given for each of the above reasons and provide other examples for each of these. Can you think of examples that suggest a different viewpoint to that of the writer?
- Give examples of specialization and division of labour from your own experience at home or where you have studied.
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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Scarcity, the fact that things are in limited supply, constrains us, that is it places limits on us. One of the most important facts of life on our planet is that productive resources are limited. However, human desires for goods and services are virtually unlimited. Since we cannot have as much of everything as we would like, we are forced to choose among alternatives.
When resources are used to produce good A, say a shopping centre, that action takes resources away from the production of other goods that are also desired. The shopping centre is then the highest valued from the set of goods that could have been produced and consumed for the required cost. The others now must be sacrificed, because the required resources were used instead to produce the shopping centre. The use of resources to produce one thing reduces their availability to produce other things. Thus, the use of scarce resources always involves a cost. To use a common English saying, there is no such thing as a free lunch.
Costs play an extremely important function. They help us balance our desire for more of a good against our desire for more of other goods that could be produced instead. If we do not consider these costs, we will end up using scarce resources to produce the wrong things—goods that we do not value as much as other things that we might have produced.
In a market economy, consumer demand and producer costs perform this balancing function. In essence, the demand for a product is the voice of consumers instructing firms to produce a good. In order to produce the good, however, resources must be taken away from their alternative uses—primarily the production of other goods. Producers incur costs when they take resources away from the production of other goods. These costs, what the producers give up, can be represented as the voice of consumers saying that other goods that could be produced with the resources are also desired. Producers have to choose which goods to produce. Naturally they will be strongly inclined, or have a strong incentive, to supply those goods that can be sold for as much or more than their production costs. This is another way of saying that producers will tend to supply those goods that consumers value most relative to their production costs.
Of course, a good can be provided free to an individual or group if others foot the bill. But this merely shifts the costs; it does not reduce them. Politicians often speak of ‘free education’, ‘free medical care’, or ‘free housing’. This terminology is deceptive. None of these things are free. Scarce resources are required to produce each of them. For example, the buildings, labour, and other resources used to produce schooling could be used instead to produce more food, recreation, entertainment, or other goods.
The cost of the schooling is in fact the value of those goods that must now be given up because the resources required for their production were instead used to produce schooling. Governments may be able to shift costs, but they cannot avoid them. The concept that ‘scarce resources have a cost’ applies to all things.
With the passage of time, of course, we may be able to discover better ways of doing things and improve our knowledge about how to transform scarce resources into desired goods and services. Clearly, this has happened over the years. During the last 250 years, we have been able to relax the grip of scarcity and improve our quality of life. However, this does not change the fundamental point—we still confront the reality of scarcity. The use of more labour, machines, and natural resources to produce one good forces us to give up other goods that might otherwise have been produced.
Questions
Grammar and Sentence Structure
- Identify the nouns and adjectives in the last three paragraphs. Use five of each of them in sentences of your own to bring out their meaning.
- Rewrite the first paragraph in the past tense.
- Identify the pronouns in the first three paragraphs and say to what each of them refers.
- Identify the prepositions in the last three paragraphs and use them in sentences of your own.
- Divide the sentences here that are combined with conjunctions into separate sentences.
- Using conjunctions, join three pairs of simple sentences in this passage.
Vocabulary
- In groups, work out from their context the meanings of the highlighted words, and use them in sentences of your own.
- Find words or phrases in the last five paragraphs of this passage that are used to convey meanings similar to the following – Rare, wanted, compels, think of, move, relaxation, face, pay, change, loosen,
Use both the words or phrases in the passage, as well as those given here, in sentences of your own.
Comprehension
- Summarize the main argument of this passage in not more than five sentences.
- Give arguments for and against the point the writer makes about ‘free’ education.
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
- 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.
- Rewrite paragraph five in the present tense and paragraph six in the past tense.
- Identify the pronouns in the third paragraph and say to what each of them refers.
- Identify the prepositions in the last paragraph and use them in sentences of your own.
Vocabulary
- In groups, work out from their context the meanings of the highlighted words, and use them in sentences of your own.
- 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.
- Use both the words or phrases in the passage, as well as those given here, in sentences of your own.
- Form verbs from the italicized nouns and use them in sentences of your own.
Comprehension
- 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?
- What is the point of the examples given in the last paragraph? Do you agree with this?
- Summarize the main argument of this passage in not more than five sentences.
Rajiva Wijesinha 