68755

English for future business economists

Книга

Иностранные языки, филология и лингвистика

The goal of book is to develop and improve students’ English language skills in reading. The texts contain important information concerning the importance of business activity in our lives, different methods of classifying business activity, different forms of business ownership, production and costs of production.

Английский

2014-09-25

9.69 MB

2 чел.

MINISTRY OF FINANCE OF UKRAINE

Yaremchuk L. I.

ENGLISH

FOR FUTURE

BUSINESS ECONOMISTS

Dnipropetrovsk - 2010


MINISTRY OF FINANCE OF UKRAINE

Dnipropetrovsk state finance academy

Yaremchuk L. I.

ENGLISH

FOR FUTURE

BUSINESS ECONOMISTS

Dnipropetrovsk - 2010


Yaremchuk L. I.
English for future business economists. – Dnipropetrovsk: DSFA. 2010. – 63p

English for future business economists is a book of texts intended for self-study.

Reviewed by Kuchina N. M., associate professor at the Department of Foreign Languages.

Approved by the meeting of the Department

of Foreign Languages

Record № 12 of 14.06.2010


PREFACE

“English for future business economists” is a book of texts intended for self-study. The goal of book is to develop and improve students’ English language skills in reading. The texts contain important information concerning the importance of business activity in our lives, different methods of classifying business activity, different forms of business ownership, production and costs of production. When reading these texts students will learn about such key components of industrial business as diverse nature of business, resources of business, functions of business, classification of business, production, production control, production functions, costs of production and the major sources of productivity growth.

Each text is followed by pertinent exercises designed to check comprehension and to develop students’ skills in profession-oriented speaking. In addition, the book includes tasks to encourage students to use the economic way of thinking when making business decisions on production. The future business economists will learn how theoretical concepts can be implemented in real decision-making. The texts demonstrate the relation of production to financing, marketing and productivity.

The texts contain numerous examples to facilitate students’ understanding of essential concepts and to demonstrate the usefulness and importance of the theories for decision-making in production. The book is very useful for prospective business economists.


Text 1

What is a business?

The human body requires a minimum of food, drink and protection from the extremes of climate in order to survive. People co-operate in order to satisfy these basic needs, with the family as the most basic economic group. In some societies the amount produced is just enough to keep people alive. These are known as subsistence economies. Other people are more fortunate and are able to produce a surplus in some goods. This surplus may be stored as an insurance against future hardship or traded for goods and services which the society cannot produce for itself.

Very early in human history it was realized that individuals possessed different talents, and that if they concentrated their efforts on the activities in which they excelled the standard of living of the whole community would improve. This specialization also implied that trade would have to take place. The weaver might have had a higher standard of living by concentrating all effort on making cloth. She/He also needed food and shelter which would be provided by other individuals or groups of individuals. The activities in which people engaged were no longer directed towards the satisfaction of all their own needs – and luxuries if they were fortunate – but were concentrated on a relatively narrow range of goods and services which they would exchange with other people. People began to be described by the work they did, a development which is reflected in some British family names, e.g. Cartwright, Weaver, Thatcher, Butcher, Farmer, Smith etc.

The word ‘busy’ is used to describe a person who is engaged in action, i.e. occupied. We tend to be selective in the way we use it. You seldom hear people describe themselves as being busy if they are doing a hobby. The word is used to describe activities people regard as being important to their survival or comfort.

In developed economies very few people attempt to satisfy the full range of their needs and wants by their own direct work. Most people sell their skills as carpenter, teacher, plumber, manager, accountant or lawyer to other people, and use the money they get in return to buy the goods and services they need to live. The activities necessary to provide us with the goods and services we want are carried out in factories, mines, workshops, foundries, shops and offices, where a group of people with different skills can co-operate to produce goods and services for sale to other people. Some people, of course, continue to work from home for a variety of reasons. It may be cheaper, or more convenient, or the amount of work undertaken may not justify a separate workshop or office.

A business may be simply defined as a person or group of people buying in goods and services in order to produce other goods and services for the purpose of sale at a profit.

1. Which of these statements expresses the main idea of the text?

  1.  Business is the activity of making money by producing or buying and selling goods, or providing services.
  2.  In developed economies very few people try to satisfy all their needs by their own direct work.
  3.  We use the word ‘busy’ to describe actions that we consider important.
  4.  Business is an integral part of the society in which it operates.

2. Find in the text English equivalents of these words and phrases.

1. людський

24. володіти

47. займати місце, посаду

2. вимагати

25. зосереджуватися

48. вибірковий

3. їжа, харч

26. зусилля, напруження

49. вважати, стосуватися

4. захист, охорона

27.переважати; відзначатися

50. виживання

5. крайність

28.поліпшувати(ся)

51.пробувати, намагатися

6. вижити

29. означати, мати на увазі

52. потреби, необхідність

7. співробітничати

30. ткач, ткаля

53. продавати, торгувати

8. задовольняти

31. тканина, полотно

54. уміння

9. потреби

32. притулок, укриття, сховище

55. тесляр

10. основний

33.постачати, забезпечувати

56. водопровідник

11. суспільство (2)

34. займатися чимось

57. бухгалтер, рахівник

12. кількість, загальна сума

35. спрямований на щось

58. юрист, адвокат

13.вироблений, створений

36. задоволення

59. у відповідь

14. живий

37. розкіш, предмет розкоші

60. купувати

15. існування, засоби до існування

38. відносно

61. доводити до кінця

16. бути щасливим

39. обмежений, скрутний

62. шахта, рудник

17. надлишок, залишок

40. асортимент товарів

63. майстерня, цех

18. товар

41. обмінювати(ся)

64. ливарний цех

19. робити запас

42. розвиток

65. зручний, підходящий

20. страхування

43. бути відображеним у чомусь

66. починати, братися за щось

21. труднощі

44. м’ясник

67. виправдовувати, знаходити виправдання

22. послуги

45. коваль

68. намір, мета

23. здійснювати,

усвідомлювати

46. володіти

69. вигода, прибуток


3
. Are these statements true or false? Correct the false ones.

  1.  A minimum of food, drink and protection from the extremes of climate is not enough to keep people alive.
  2.  Some people are fortunate because they fail to produce a surplus in some goods.
  3.  An excess of goods may not be stored as an insurance against future difficulties.
  4.  In early history individuals possessed different gifts and they concentrated their efforts on the activities in which they would be able to improve the standard of living of the whole community.
  5.  The word “busy” is used to describe activities people consider as being unimportant to their survival or comfort.
  6.  You rarely hear people describing themselves as being busy if they are doing a hobby.
  7.  In advanced economies a lot of people try to satisfy the full range of their needs and wants by their own hard work.
  8.  Some people sell their skills in order to buy the goods and services they need to survive.
  9.  Most people work from home because it may be cheaper or more convenient.
  10.  People enjoy working in groups because they can co-operate to produce goods and services for sale to other people.

4. Answer the questions.

  1.  What does an individual require in order to survive?
  2.  Why do people co-operate?
  3.  What is a business?
  4.  What is the main purpose of all business activities?

Text 2.

The diverse nature of business

(Part I)

In a wealthy society business is not just concerned with the satisfaction of basic needs. From the definition we can see that the existence of a business community in a society means that surpluses have been generated. The wealthier the society, the more advanced the technology and the wider range of goods and services available.

There are six main elements that are common to all business activity:

  •  objectives;
  •  the resources used by the business;
  •  the functions undertaken by the business;
  •  the constraints on achieving the objectives;
  •  the functions of management;
  •  integrating themes.

The objectives of business

A company is required by law to state the type of business activity it intends to undertake before it can begin trading. In addition to these stated aims the managers of a business will have a number of long-term objectives that they will attempt to achieve. These will include profitability, survival, prestige, growth and social objectives.

Profitability

The word ‘profit’ should be approached with caution. It has a number of meanings which will vary according to the context in which it is used.

1  To an economist profit is the reward for risk-taking. The person who takes the risk of organizing resources to produce a new product or to provide a new service is sometimes referred to as an entrepreneur. A person mortgages a house to raise money to start a business. She/He is risking a major personal capital investment in this enterprise and is putting more into it than just labour. Profit is seen as the reward for this extra commitment.

2  An accountant would define profit as the difference between revenue and expenditure; that is the difference between the money received as a result of the activities of the business (the revenue), and the costs associated with those activities (the expenditure). If it costs £100000 to produce a certain number of goods which bring in a revenue of £125000 when sold, a profit of £25000 has been made.

3  In political terms a profit can be elevated to the most important drive in the economy of a country, encouraging people to work productively and to take risks, which will lead to greater wealth for all. Other people see profit as the result of employers using their power to take an unfair advantage of the people they employ and of the people they sell to. Profit, in this case, is believed to exist because wages and salaries have been unfairly depressed and/or prices have been unfairly high (exploitation).

Again, in stating the objectives of a business, economists assume that each business will attempt to maximize its profit, that is to continue to expand production until it has made the greatest amount of profit it is capable of. In practice it is more likely that a business will satisfice. This unpleasant word means simply that the business will decide on a profit level it considers to be satisfactory taking into account the amount of capital employed, the general profit level of the industry it is operating in, the profits it has achieved in previous years, the personal ambitions of its owners and managers and the overall objectives of the business.

The idea that business aim for a satisfactory level of profit rather than the maximum possible profit suggests complacency on the part of management and the owners.

In setting profit targets businesses are limited by:

  •  the funds the business has at its disposal. Achieving maximum profit may require further investment which the business cannot afford.
  •  the complexity of the decisions to be made. If there are a large number of decisions it becomes increasingly difficult to judge the effect each separate decision will have on the final outcome – particularly as the outcomes of one decision may have unforeseen effects on the outcomes of other decisions.
  •  the quantity and quality of the information available to management when making the decisions.

Research suggests that management places a very high level of importance on achieving profit objectives, especially long-term objectives. This implies that the profit targets set as satisfactory are in fact the best possible targets the management believes the business is capable of. You should remember that long-term rather than short-term profit objectives tend to be regarded as the more important when considering the importance of profit in relation to the other objectives of a business.

The following examples will give you some insight into the way in which the importance of profitability can vary according to the circumstances in which a business finds itself.

1  The owner of a small business deliberately decides against acquiring more assets because she/he wishes the business to stay small. Expansion might bring higher profits, but the additional responsibility would interfere with the private life of the owner.

2  A very large business with factories in number of countries deliberately selects a very low price for a new product in a particular national market. In the short term it sacrifices profits. In the long term it drives its competitors out of business and is therefore in a position to make higher profits.

3  A business is running at a loss. It can remain in operation for two years. There is reason to believe that within the next twelve months more people will buy the goods it sells and within eighteen months it will make a profit once more. A decision is made that it should accept the present losses and stay in operation, rather than sell the business and re-invest the proceeds of the sale in a more profitable venture.

The examples given above were designed to show that the profit motive, although essential for the survival of a business, can appear to be superseded in the short term if other objectives are seen to be more desirable. The small business owner in the first example was satisficing. There was enough profit to finance a satisfactory lifestyle and no desire to sacrifice personal objectives to make more money. The sacrifice to be made in terms of leisure was greater than the satisfaction to be gained from additional income and greater personal prestige. In other words the opportunity cost of expanding the business was too great.

Profit, as a surplus of revenue over expenditure, is the most important objective of any business.

1  It provides money to buy raw materials, employ labour and pay for the services needed to keep the business in operation.

2  It provides a reserve for future investment. The small business owner who refuses to expand to achieve greater profit might find a valued lifestyle threatened if a change in technology lowers the price of competitors’ goods but the business has insufficient reserves, generated by profits, to buy the new machines.

3  It can make it easier for a business to raise capital from outside sources. People are more willing to buy a share of a business that is making a good profit than one that is making a low profit compared with the rest of the business community.

4  Profit can act as a measure of the success of a business.

5  Profit can act as an incentive to greater effort.

Because profit allows a business to continue in existence and is essential for future investment, it is usually regarded as the prime objective of all businesses owned by private individuals, as opposed to those owned by the state.

1. Which of these statements expresses the main idea of the text?

  1.  The existence of a business community in a society means that surpluses have been generated.
  2.  The long-term objectives of the business will include profitability, survival, prestige, growth and social objectives.
  3.  Profit is a measure of the success of a business.
  4.  Business can remain in operation for two years.

2. Find in the text English equivalents of these words and phrases.

  1.  різний, відмінний

40. видатки

79. відповідно до обставин

  1.  багатий

41. результат діяльності

80. обдумано; навмисно

  1.  стосуватися, відноситися

42. витрати

81. набувати, одержувати

  1.  існування, наявність

43. пов'язаний з чимось

82. активи

  1.  ділові круги

44. приносити доход

83.поширення, розширення

  1.  надлишок, решта

45.найважливіший напрямок

84. відповідальність

  1.  породжувати

46. заохочувати

85. втручатися; заважати, перешкоджати

  1.  передовий, прогресивний

47.працювати продуктивно

86. вибирати, відбирати

  1.  наявний

48. керувати, управляти

87. витіснити з бізнесу

  1.  ділова активність

49. наймач, роботодавець

88. збиток, втрата

  1.  мета (3)

50. сила, енергія, міць

89. залишатися в дії

  1.  ресурси

51. несправедливий

90. реінвестувати

  1.  обмеження

52. перевага, вигода, користь

91. виручка від продажу товару

  1.  вимагати

53. існувати, жити

92. більш прибуткове підприємство

  1.  заявляти, формулювати

54.заробітна плата робітників

93. розроблений

  1.  мати намір

55.заробітна плата, оклад

94. мотив прибутку

  1.  до того ж, крім того

56.несправедливо високий

95.обов’язковий, необхідний

  1.  довгостроковий

57. експлуатація

96. заміняти, звільняти (працівника)

  1.  прибутковість

58. припускати, вважати

97. бути більше бажаним

  1.  виживання

59.пробувати, намагатися

98. заробляти більше грошей

  1.  престиж

60. доводити до максимуму

99. жертва

  1.  збільшення, приріст

61. розширяти виробництво

100. дозвілля

  1.  підходити, наближатися

62. здатний, здібний

101.здобувати, одержувати

  1.  обережно

63. задовольняти

102.додатковий дохід

  1.  відповідно до

64. у попередні роки

103.витрати в результаті прийнятого альтернативного курсу

  1.  винагорода

65. загальний, повний

104.розширення бізнесу

  1.  ризик

66. пропонувати

105.забезпечувати грошима

  1.  брати ризик

67. самовдоволення; благодушність

106.сировина

  1.  виробляти, створювати

68. кошти, фонди

107.наймати робочу силу

  1.  стосуватися

69. бути в розпорядженні у когось

108.зберегти бізнес

  1.  підприємець

70. мати змогу зробити щось, дозволити собі

109. забезпечити резерви

  1.  заставляти, ручатися

71. складність

110.відмовляти(ся)

  1.  діставати гроші

72. судити

111.конкурент, суперник

  1.  розпочати бізнес

73. кінцевий результат

112.недостатні резерви

  1.  інвестиції, капіталовкладення

74. передбачати

113.зовнішні джерела

  1.  підприємство

75. кількість

114.купити долю у бізнесі

  1.  праця, робоча сила

76. якість

115. міра успіху

  1.  зобов’язання

77. мати на увазі, означати

116.стимул

  1.  доход

78. вважати за

117.протиставляти

3. Are these statements true or false? Correct the false ones.

  1.  In a rich society business is only oriented on satisfaction of basic necessities.
  2.  The advancement of technology and the range of goods and services available depend on the financial status of society.
  3.  The law requires a company or firm to state the type of its business activity.
  4.  The managers of a business usually attempt to achieve long-term objectives.
  5.  The word “profit” should be approached with prudence.
  6.  Profit is money that you make by selling something or from your business, after your costs have been paid.
  7.  If the encouraging people work productively and take risk it will be worse to the country’s economy.
  8.  According to economists each business attempts to maximize its profit.
  9.  When making the decision the management of the company relies on the number of the available information.
  10.  Management is very important in achieving short-term profit objectives.
  11.  Profit gives money to buy raw materials, hire new workers and pay for the services needed to keep the business in operation.
  12.  People refuse to buy a share of business that is making a low profit compared with the rest of the business community.
  13.  Everyone thinks money is relatively unimportant.
  14.  Profit is usually regarded as the prime objective of all businesses owned by private individual because it allows a business to continue in existence and is essential for future investment.

4. Answer the questions.

  1.  What elements are common to all business activities?
  2.  What does the word ‘profit’ mean?
  3.  Who is an entrepreneur?
  4.  What is the difference between an accountant’s and an economist’s definition of profit?
  5.  What are the circumstances in which other objectives might be more important than profit?
  6.  What are the arguments to support the view that profit is the most important long-term objective of a business enterprise?

5. Write key words and phrases to each paragraph of the text.

Text 3

The diverse nature of business

(Part II)

Survival

This must be as important an objective for a business as it is for individuals. The need to survive can override the profit motive in the short term. The divorce of ownership and control – where a business is owned by one group of people and managed or controlled by another – can lead to a conflict of objectives. The management might be more interested in survival strategies to secure their jobs. Survival can be a short-term objective to achieve future profits. It can also be seen as a subversive, unrecognized objective arising out of the personal experience and objectives of the people employed. The desire to protect their employment can lead to a reluctance to take necessary risks. When it is the latter it can be described as sabotage – an action designed to hinder the achievement of a stated objective.

Prestige

The desire for prestige, i.e. to be held in high regard by other people whose opinions you value, does not seem at first sight to contribute a great deal to either the profit motive or survival. It can, however, contribute to both, and some businesses actively seek to enhance their prestige in order to increase sales. Businesses might seek prestige from high quality products, from care for the environment, from the use of the latest technology or from care for its employees. Essentially it is attempting to build up an image for excellence in one area of its operations that will attract potential customers, or present a more favourable impression of its operations to the world. If customers believe that the activities of a business, undertaken to acquire profit, are in some way dishonourable, they may withdraw their custom from that business.

The pursuit of prestige could lead to lower profits in the short term when money might be spent on advertising, improving quality control or the provision of better employee services. In the long term a company with prestige can expect to find a better quality of applicants for any jobs they advertise, an increase in sales and, potentially, an increase in profits.

Growth

The objective of growth might be rationally based on the fact that if the business grows larger the cost of each item it produces will fall (economies of scale). It might also be the result of a personal desire on the part of the owner for more power or it might be a desire to take over and eliminate competitors so that there will be more scope for greater profit. In the first and last cases the profit motive dominates. In the second case it is an example of personal motives subordinating purely business motives.

Society

A business can be defined as a person or group of people who offer goods and services to the rest of the community in return for payment. From our analysis of business objectives we could add ‘for a profit’ to this definition. Profit can be seen as an advantage derived from an action, not necessarily expressed in monetary terms. The social benefits derived from a nationalized industry, such as cheap transport services or lower fuel costs, can be interpreted as a ‘profit’ to the community. A nationalized industry may run at a loss over a number of years and receive payments from the Treasury to cover the losses (subsidies). The extent of this is a political decision.

1. Which of these statements expresses the main idea of the text?

  1.  The desire for prestige does not seem at first sight to contribute a great deal to either the profit motive or survival.
  2.  Survival can be a short-term objective to achieve future profits.
  3.  A business can be defined as a person or group of people who offer goods or services to the rest of the community in return for payment.
  4.  The desire to protect their employment can lead to reluctance to take necessary risks.

 

2. Find in the text English equivalents of these words and phrases.

  1.  не приймати до уваги

11. небажання

21. відкликати

  1.  розподіл власності

12. саботаж, диверсія

22. клієнт

  1.  призвести до конфлікту

13.заважати, перешкоджати

23. погоня

  1.  отримувати роботу

14. сприяти, робити вклад

24. реклама

  1.  майбутні прибутки

15.збільшувати, посилювати

25.поліпшення контролю якості

  1.  руйнівний, підривний

16.добиватися, домагатися

26.поліпшення обслуговування службовців

  1.  невизнаний

17. службовці

27. знаходити кращих претендентів

  1.  що випливає з власного досвіду

18. створювати імідж

28. рекламувати

  1.  бажання, прохання

19.одержувати прибуток

29. збільшення продажів

  1.  захищати, охороняти

20. безчесний, ганебний

30.потенційно збільшити прибуток

3. Are these statements true or false? Correct the false ones.

  1.  Survival is considered to be an important objective for a business and for people.
  2.  The want to survive can predominate over the income reason in the short term.
  3.  The contradiction between ownership and control can lead to a conflict of targets.
  4.  Survival is a short-term aim to achieve future profits.
  5.  The pursuit of prestige could lead to higher profits in the short run.
  6.  The desire to protect their employment can lead to reluctance to take necessary risks.
  7.  The company builds up its image producing high quality goods, taking care of the environment, using the latest technology.
  8.  In the short term a company can expect to find high quality workers for any jobs they advertise.
  9.  If the business grows larger the cost of each item it produces will fall.
  10.  The social benefits received from a nationalized industry is considered to be a ‘profit’ to the community

4. Answer the questions.

  1.  What can lead to a conflict of objectives?
  2.  What can lead to a reluctance to take necessary risk?
  3.  What could lead to lower profits in the short term?
  4.  Why might a business be prepared to accept a reduction in short-term profits to achieve objectives relating to prestige and social approval?

5. Write a summary of the text.

Text 4.

The resources of business

For ease of reference it is usual to divide the resources used by business into land, labour and capital. These are known as the factors of production.

1  Land is used to describe all natural resources – including those obtained from the sea! – such as minerals, wood, water and the land itself.

2  Labour describes the physical and mental skills of the population who are able to work.

3  Capital is used to describe all manufactured things which are used to produce other goods and services. This implies that at some time in the past people have sacrificed the opportunity to use some goods immediately (consume them) in return for a higher standard of living in the future.

4  Some economists would add enterprise (the ability and willingness to risk the loss of capital) to this list.

The classification of resources given above is a convenient shorthand for the very wide range of materials, machinery, skills and information a business imports from its environment. These are also known as inputs.

Of course not all businesses will require the same type of resource in the same quantities and at the same time. Some businesses need a small number of highly skilled people whilst others need large numbers of unskilled people. But all the businesses need the factors of production. This they have in common.

1. Formulate the main idea of the text.

2. Find in the text English equivalents of these words and phrases.

  1.  розподіляти, ділити(ся)

10. уміти працювати

19. стенографія

  1.  земля

11. виготовлені речі

20. матеріали

  1.  капітал, багатство

12.негайно, безпосередньо

21. машини

  1.  фактори виробництва

13. споживати

22. ділова обстановка, середовище

  1.  природні багатства

14. у відповідь

23. витрати

  1.  одержувати, здобувати

15.додавати, приєднувати

24. висококваліфіковані кадри

  1.  мінерали

16. здібність, здатність

25. некваліфіковані люди

  1.  дерево

17. готовність

  1.  фізичні та розумові здібності

18. втрата капіталу

3. Are these statements true or false? Correct the false ones.

  1.  Factors of production are resources used in any business activity.
  2.  There are many factors of production.
  3.  All natural resources are naturally-occurring goods such as soil and minerals that are used in the creation of products.
  4.  Labour shows the ability of the population to work.
  5.  Capital is the total stock of wealth owned by the business.
  6.  Capital is something that people never get back.
  7.  The classification of resources is used to reduce the range of inputs.
  8.  Some businesses require a lot of highly qualified people.
  9.  All businesses need a large number of unskilled people.
  10.  All businesses need resource inputs to produce goods and services.

4. Answer the questions.

  1.  What are the factors of production?
  2.  What does the term ‘labour” describe?
  3.  What does the capital describe?
  4.  Do all the businesses require the same type of resources in the same quantities?
  5.  How long do you think each input might stay in the business? Give reasons for your answer.

5. Group the following inputs into a business in terms of land, labour, capital and enterprise:

wood   computer   typist   factory   paper   manager   van   plastic   lathe   food

Text 5.

The functions of business

All businesses irrespective of size, product or the technology used, have several functions in common, including production, marketing, finance, control and people.

Production

The production function relates to all activities concerned with the creation or making of the goods or services the business intends to sell. This will include the purchase of raw materials, the location of the business, the organization of the work process and the control of quality. Methods of production will vary according to the product of the business, its size, the size of the market and the technology available to it.

Marketing

The marketing function includes researching the market, product planning, packaging, pricing, advertising, sales promotion and the distribution of the product to the final consumer. These activities are known as the marketing mix. They are the ingredients in any marketing plan, but their relative importance will vary according to the type of product, the customers (either consumers or other firms) and the objectives of the business itself.

Finance

Every business needs money to start up and remain in operation. The management of money is, therefore, essential for business survival.

Control

A business has its objectives, and all its activities should be directed towards achieving those objectives. It needs to establish ways of testing whether or not this is happening and to adapt its methods accordingly. To do this it will use a variety of methods, many based on statistical and accounting techniques.

People

All businesses need to manage people. Even the smallest business in which the owner is the only person concerned has this function. The owner has to manage him/herself! If you do not believe this, think about how often your own ability to achieve your objectives depends on such apparently trivial things as getting out of bed early enough in the morning, organizing a study programme or simply remembering to make a list of the things you need to do. Managing yourself is probably the most difficult task in people management!

Constraints

A constraint is a restriction placed on an individual or a group which prevents them achieving their objectives. Constraints can be internal (availability of finance, available skills in the workforce, existing plant, organization), or external (the state of the economy, legal requirements, the behaviour of competitors and customers, social and political attitudes).

1. Which of these statements expresses the main idea of the text?

  1.  The production function relates to all activities concentrated on the creation or making of the goods or services the business intends to sell.
  2.  Every business needs money to start up and remain in operation.
  3.  Managing yourself is probably the most difficult task in people management!
  4.  All businesses have several functions in common such as production, marketing, finance, control and people.

2. Find in the text English equivalents of these words and phrases.

  1.  функції бізнесу

19. ціноутворення

37.запобігати, перешкоджати

  1.  незалежно від розміру

20. стимулювання збуту; стимулювання праці торгових працівників

38. внутрішній примус

  1.  взагалі

21. розподіл продукції

39. стан економіки

  1.  виробництво, продукція

22. кінцевий споживач

40. юридичні вимоги

  1.  маркетинг

23. комплекс маркетингу

41.поведінка конкурентів і клієнтів

  1.  мати відношення до

24. складова частина

42. заощадження

  1.  причетний до

25. відносна важливість

43. вимога

  1.  розробляти продукцію

26. залишатися в дії

44.демографічна тенденція

  1.  мати намір

27. необхідний, істотний

45. рівень безробіття

  1.  покупка

28. виживання бізнесу

46. відношення до бізнесу

  1.  сировина

29. пристосовувати

47. профспілки

  1.  розміщення бізнесу

30. відповідно

48. правова установа

  1.  організація виробничого процесу

31. оснований на

49. закони

  1.  контроль якості

32. статистичний метод

50. стан технології

  1.  придатний, корисний

33. керувати людьми

51. відношення уряду до 52. досліджень

  1.  дослідження ринка

34. досягати мети

53. запаси на час війни

  1.  планувати асортимент виробів

35. примус

18. упаковка

36. обмеження

3. Are these statements true or false? Correct the false ones.

  1.  All businesses have different functions.
  2.  Business activity exists to satisfy the needs and wants of people.
  3.  The production is a technological relationship expressing the maximum quantity of a good attainable from different combinations of factor inputs.
  4.  Production methods will vary according to the product of the business, its size, the size of the market and available technology.
  5.  The marketing plan includes the marketing mix.
  6.  Marketing is a business activity which aims to satisfy the wants of customers.
  7.  The marketing mix will be affected the benefits a product offers the consumer and the type of the product.
  8.  Money is not essential for business survival.
  9.  The owner of a business is a resource of that business.
  10.  There are internal and external constraints.

4. Answer the questions.

  1.  What are the main functions of business?
  2.  Why the design of a new product is the concern of all business functions?
  3.  What does the marketing function include?
  4.  What is the marketing mix?
  5.  What is essential for business survival?
  6.  What is the most difficult task in people management?
  7.  What is the difference between internal and external constraints?

5. Write a summary of the text.

Text 6.

Business classifications

At any one time, no two businesses have precisely the same ‘mix’ of objectives, resources, functions or constraints. Products differ, and resource requirements will vary in both size and type. A business whose customers finance their purchases of its product by borrowing money will experience a sharper and more immediate drop in sales when interest rates rise than a business making a relatively cheap product.

Businesses which appear very different may have certain characteristics in common that have a significant effect on their behaviour in certain situations. For example the size of a business will determine the financial resources it has at its disposal. When studying business it can be useful to group together all businesses that share a particular characteristic in order to gain an insight into the problems they face or the advantages they enjoy as a result. This grouping is known as classification. Figure 2 illustrates ten possible classifications. You should remember that grouping disparate items into classes for ease of reference is normal practice. Classes in schools and colleges are good examples. ‘The business studies group’ is a convenient term of reference for staff in some situations. The list of potential classifications in business is not limited to ten.

1. Formulate the main idea of the text.

2. Find in the text English equivalents of these words and phrases.

  1.  фінансувати

8. відносно дешевий продукт

15.здобувати, одержувати

  1.  позичати, запозичати

9. здаватися; з’являтися

16. зіткнутися лицем в лице

  1.  відчувати

10. значний ефект

17.групування, класифікація

  1.  різке падіння

11.визначати, вирішувати(ся)

18. штат, персонал

  1.  негайний, невідкладний

12. фінансові ресурси

19. бути обмеженим

  1.  процентна ставка

13. бути в розпорядженні когось

20. непорівнянний

  1.  зростати, збільшуватися

14. групувати

3. Are these statements true or false? Correct the false ones.

  1.  All firms share the same experiences and problems.
  2.  Different businesses peculiar characteristics in general that have a certain influence on their functioning.
  3.  In order to gain an insight into the problems that businesses face it is useful to group together all businesses with particular characteristics.
  4.  It is known that grouping disparate items into classes for the ease of reference.
  5.  The list of potential business classifications is usually limited to ten.

4. Answer the questions.

  1.  Do all types of businesses have precisely the same ‘mix’ of objectives?
  2.  What will determine the size of the business?
  3.  What is classification?
  4.  Will it be useful to group together all business activities?
  5.  How can the business be described?

5. Write a summary of the text.


Text 7.

Classification by size

Businesses are generally classified as being small, medium or large – a simple statement that disguises a number of problems of definition. The terms of reference of the Bolton Committee, set up in 1968 to inquire into the role of small firms in the British economy, defined small firms as those with not more than two hundred employees. This proved to be inadequate. How would you classify a business with less than one hundred employees but with a high value product and a turnover of £1m per annum? There are of course some businesses that clearly fall into one category or another. Nobody would dispute that Ford (UK), ICI and Unilever are very large businesses. Equally the one person corner shop is a very small business. The classification of businesses by size can be done according to the following criteria.

1  The size of its market share  The market share of a business is its total sales expressed as a percentage of the total sales of the industry in which it operates. It is sufficient to point out that if a business employs less than one hundred people, but has a 90 per cent share of the market in which it operates, the influence it exerts on that market will be greater than the influence exerted on its market by a business employing thousands, whose market share is 20 per cent.

2  Annual sales (turnover)  A high –cost product can generate more sales per employee than a low-cost product.

3 The amount of capital employed  A business which uses advanced technology is likely to have relatively few employees. Automation will intensify this trend.

4 The way in which it is organized  The Bolton Committee argued that personal management by the owners of a business was a characteristic of a small firm. As business increase in size the work load becomes too great for a small group of people, managers are employed and the control exercised by the owners decreases. We shall look at this in more detail when we discuss classification by ownership below.

5  The law distinguishes between small and medium-sized companies. The criteria on which it does this is summarized in the chart in Figure 3.

Classification by size is an introduction to the importance of scale in business. The word ‘scale’ indicates the way in which you should think of the size of a business. It is not the absolute size which is important but the size of a business in relation to the size of other businesses.

1. Which of these statements expresses the main idea of the text?

  1.  Although each business is unique, by classifying business we can study the characteristics they have in common.
  2.  There are different methods of classifying business activity.
  3.  It is important to understand the ways in which all businesses resemble each other.
  4.  Businesses are generally classified as being small, medium or large.

2. Find in the text English equivalents of these words and phrases.

1.зображати неправдиво, перекручувати

12. виражений у процентах

23. автоматизація

2. ставити

13. достатній

24. посилювати(ся)

3.довідуватися, дізнаватися

14. указувати (2)

25.напрям, тенденція

4. невідповідний

15.напружувати (сили)

26.особисте керівництво власником

5.високоякісний продукт

16. вплив

27.завантаження підприємства замовленнями

6. оборот, обіг

17.річний товарообіг

28.дрібне підприємство

7. обговорювати

18. дорога продукція

29. середня компанія

8. рівно, порівну

19. породжувати

30. розмір компанії, бізнесу

9. критерії

20. дешеві вироби

31.абсолютний розмір

10. розмір частки на ринку

21. розмір капіталу

32. по відношенню до

11. загальні, сумарні витрати

22. передова техніка, технологія

3. Are these statements true or false? Correct the false ones.

  1.  There are two types of business entities.
  2.  Small firms are those which with more than two hundred employees.
  3.  Ford (UK), ICI and Unilever are considered to be large businesses.
  4.  There are four criteria for the classification of businesses by size.
  5.  The influence the business exerts on the market depends not only on the number of its employees but also on the size of its market share.
  6.  Automation reduces the number of employees.
  7.  In a small company average weekly employees are equal to or less than fifty.
  8.  In a medium-sized company assets are equal to or less than £8 mln.
  9.  If, over a period of two years, turnover is equal or less than £2 mln, it is a small company.

4. Answer the questions.

  1.  Why are there a number of ways of classifying a business by size?
  2.  What is the market share of a business?
  3.  What does the word ‘scale’ indicate?

5. Write a summary of the text.

Text 8.

Classification by ownership

The major distinction is between businesses owned by central or local government, i.e. the public sector of the economy, and businesses owned by individuals or groups of individuals, i.e. the private sector of the economy. This classification is useful when speaking in general terms.

‘The Government has set a limit of 3 per cent on all wage increases for public sector employees.’

‘It is difficult to estimate the effect of the cutback in Government spending on the private sector.’

Neither the public nor the private sectors are homogeneous (that is of identical structure) in terms of ownership, and when discussing the problems associated with different types of ownership it is important that we specify which type we are talking about. These are outlined in Figure 4.

Forms of private ownership – the sole trader

This term is used to describe a business wholly owned by one person, although there may be a number of people employed in running the business. Businesses owned by one person are often, but not necessarily, small. Their growth is limited by the amount of capital available and this in turn is limited by the personal resources of the founders and their success in trading.

Sole traders are accountable only to themselves and this can make this form of business ownership very attractive to people who have strong ideas on the way in which they want their business to be run. Added to this there are very few legal restrictions on the formation of a one person business, which increases its flexibility. The owner of the business does not have to consult other people before making decisions which can improve the speed with which the business responds to changing conditions.

The lack of specific business skills on the part of the owner is often considered a drawback but this can be overcome by employing people with these skills or by using the professional services offered by other businesses, e.g. accountants, solicitors, and marketing and advertising agencies.

The sole trader is entirely responsible for the debts of the business. Should it fail and there is insufficient money to pay the debts of the business the owner can be declared bankrupt through legal process. All the property of the business and the personal property of the owner will then be sold to pay the debts and, should the money realized by the sale prove to be insufficient for this purpose, the court will have a claim on the income of the bankrupt until all debts have been paid. The sole trader is thus said to have unlimited liability for the debts and conduct of the business.

Partnerships

Partnerships are groups of people who contribute capital and management expertise to the same business enterprise and accept joint responsibility for the operation of the business. The minimum number of partners is, of course, two. The maximum number in most cases is twenty. Like the sole trader, partners are liable for all debts and conduct of their business, and because several people share responsibility and the actions of one partner could have serious consequences for the rest, there are legal restrictions on the responsibilities of the partners to each other. These are defined by the Partnership Act of 1890. Amongst other things this Act states that partners should receive an equal share of the profits. When partners have contributed varying amounts of capital this is unreasonable. To deal with this and similar situations, partners can vary the conditions of the Act by drawing up a legal document – a deed of partnership – which sets out the conditions under which they agree to do business together.

Partnerships can benefit from having more capital and expertise than the sole trader. A solicitor with experience in conveyancing (the transfer of property rights) might seek partners with experience of the legal problems of business and divorce. These are not automatic benefits of a partnership. The person setting up business as a sole trader with £40000 in capital will have a stronger financial base than three people contributing £5000 each to a partnership. Again, a person with a wide and varied experience as an industrial manager will have more expertise for a venture as a sole trader than two friends setting up as partners in their first business venture.

Limited companies

As the size of business enterprises increased in the nineteenth century, the amount of capital required increased and the ability of sole traders and partners to accumulate the necessary finance declined. Many people were willing to lend small amounts of money to a business but they had no control over the way in which it was used. They were at the mercy of the owners of the business. The solution to this problem was sought in law.

1  Companies – that is groups of people who collectively own a business under certain legal conditions – were established as separate legal entities from the people who owned them. This meant that the company would be treated as a separate person in law from its owners. The company could sue and be sued, own property and survive the death of its owners.

2  The company was granted limited liability. This can be seen as a logical extension of the fact that the company is a separate legal entity. The company is responsible for its own debts and conduct of business. If, at any time, the company cannot pay its debts it may be forced to sell all its assets in order to do so. The company goes into involuntary liquidation. This process is also known as winding up. Shareholders will lose the money they have invested in the business but other assets they possess cannot be touched.

3  Legal restrictions were placed on the formation of companies to ensure that the privileges given above were not abused.

The first instance of limited liability being granted to a restricted range of businesses was in 1662. General limited liability was extended to all registered companies by the Limited Liability Act of 1885. The conditions under which a company can register with the registrar of companies (a civil service function) are defined by the Companies Acts. The first of these Acts was passed in 1844.

1. Formulate the main idea of the text.

2. Find in the text English equivalents of these words and phrases.

  1.  основна різниця, відмінність

28.сплатити борги

55. компанія з обмеженою відповідальністю

  1.  державний сектор економіки

29.бути проголошеним банкрутом

56. накопичувати

  1.  приватний сектор економіки

30. за допомогою юридичного процесу

57. схильний, готовий щось зробити

  1.  оцінювати

31. власність бізнесу

58. позичити незначну кількість грошей

  1.  урядові витрати на приватний сектор

32. особиста власність

59. бути у владі власників бізнесу

  1.  однорідний

33. суд

60.вирішення проблеми

  1.  приєднаний

34. вимагати

61. трактуватися як

  1.  вказувати, відзначати

35.необмежена відповідальність по боргам

62.переслідувати судовим порядком

  1.  брати ризик

36. поведінка бізнесу

63.бути переслідуваним судовим порядком

  1.  акціонери

37. товариство

64. володіти власністю

  1.  обмежена відповідальність

38. вкладати капітал

65. виживати

  1.  приватна власність

39. брати спільну відповідальність

66.отримувати дотацію, субсидію

  1.  одноосібний торговець

40.бути відповідальним за борги бізнесу

67.обмежена відповідальність

  1.  засновник (компанії), акціонер

41.поділяти відповідальність

68. бути змушеним продати власні активи

  1.  успіх у торгівлі

42. серйозні наслідки

69. недобровільна ліквідація

  1.  підзвітний самому собі

43.юридичні обмеження

70. закінчення

  1.  юридичні обмеження

44. відповідальність партнерів один до одного

71. втратити гроші

  1.  збільшити гнучкість

45. отримувати рівну частку прибутку

72.гарантувати, забезпечувати

  1.  реагувати на зміни

46. нерозсудливий, нерозумний

73. привілеї

  1.  відсутність бізнесових навичок

47. договір про партнерство

74. зловживати

  1.  недолік, вада

48. мати користь (вигоду)

75. перший випадок

  1.  бухгалтер

49. перевезення, транспортування

76. погоджений

  1.  повірений, адвокат

50. передача права власності

77. умови

  1.  рекламні агентства

51. шукати партнерів

78. реєструватися

  1.  повністю відповідальний за борги фірми

52.юридичні проблеми бізнесу

79.зареєструвати компанію

  1.  зазнавати невдачі

53. фінансова основа

80. компанія з обмеженою відповідальністю

  1.  брак коштів

54. великий і різноманітний досвід

3. Are these statements true or false? Correct the false ones.

  1.  One can easily estimate the effect of the cutback in Government spending.
  2.  A sole proprietorship is an individual in business for himself or herself.
  3.  The proprietor owns or obtains the materials and equipment needed by the business and personally supervises its operation.
  4.  A sole proprietorship is easy to organize.
  5.  A proprietor must take decisions concerning buying, selling, and the hiring and training of the personnel.
  6.  In terms of ownership both the public and the private sectors of economy are homogeneous.
  7.  Businesses owned by one person are always small.
  8.  Sole trader is personally liable for all business debts.
  9.  Sole trader carries an unlimited liability.
  10.  It is easy to start a sole trader’s business at any time.
  11.  In a partnership there are two or more partners.
  12.  If an entrepreneur has debts, he ought to sell his business in order to pay the debts.
  13.  The owner of a business can be declared bankrupt through legal process.
  14.  Sole traders and partnerships are dominant forms in the small business segment.
  15.  The partnership is a firm where there are a few partners.
  16.  Partnership is easy to organize.
  17.  All partners are liable for debts and they share in the profit.
  18.  Partners jointly own a business and each partner is personally liable for the firm’s debt.
  19.  To prevent possible future discord among partners, it is usual practice to draw up an agreement.
  20.  Limited companies are separate legal entities.
  21.  Shareholders of limited companies don’t enjoy limited liability.

4. Answer the questions.

  1.  What are the major legal forms of business organisation?
  2.  What is the major distinction between the public and the private sectors of the economy?
  3.  What is a sole trader?
  4.  What does the term ‘unlimited liability’ mean?
  5.  What two types of business organisation does it apply to?
  6.  What is a partnership?

5. Write key words and phrases to each paragraph of the text.

Text 9

Public sector of the economy

Public enterprise

The public sector of the economy offers many goods and services to the consumer, some of which are financed entirely by money the government obtains from taxes or by borrowing and which are offered to the consumer free of direct charge at the point of use. Other goods and services are offered in return for payment. Usually the state owns the capital and land required for production, employing the necessary labour. Sometimes the state rents land and borrows money. In general these resources are used to produce goods and services that it is believed the private sector cannot or will not produce efficiently. The state can be involved in business in a number of ways:

  •  by owning shares in a public or private company. In this case the business will be funded and operated according to normal commercial criteria.
  •  by providing services such as health, pricing, defence, social security and advice to trade and industry. The finance for these services comes from taxation, the community charge, the business rate and government borrowing.
  •  by establishing, by Act of Parliament, a public corporation.

Public corporations

Like registered companies, a public corporation is a separate legal entity. It has been incorporated. British Rail is the type of public corporation usually referred to as a nationalised industry. Others, such as the water authorities, are sometimes called public utilities. Each nationalised industry was established by an Act of Parliament. However, there are basic similarities in their legal organisation.

1  A government minister is responsible for establishing the policy of the industry. Overall objectives are likely to be decided by the government. A company will have profit, marketing, social and other objectives decided by its board of directors. The profit objective may not be the most important for a nationalised industry. Nationalised industries have now been given a target to reach. This is expressed as a percentage return on capital employed. In a year they are expected to cover costs and make a ‘profit’.

2  Each public corporation has a board. This is a group of people appointed by the minister responsible for the industry and drawn from the industry itself, the private sector and trade unions. The board interprets the general policy guidelines laid down by the minister.

3  There is a consumer organisation which looks after the interests of the customers. Nationalised industries are monopolies. That is they are sole providers of a good pr service. The customer has no alternative but to use that business, therefore the customer needs protection.

The debate as to whether or not nationalised industries are good or bad for the economy and people tends to be fought on political grounds.

1. Formulate the main idea of the text.

2. Find in the text English equivalents of these words and phrases.

  1.  отримувати гроші від податків чи позики

14. ставка, тариф

27. профспілки

  1.  прямі витрати

15. урядова позика

28. тлумачити

  1.  у відповідь

16. державна корпорація

29. загальна директива

  1.  наймати в оренду землю

17. окрема юридична або фізична особа

30. організація захисту прав споживачів

  1.  позичати гроші

18. бути зареєстрованим як корпорація

31. піклуватися про інтереси споживачів

  1.  займатися бізнесом

19.націоналізована промисловість

32. монополії

  1.  володіти акціями компанії

20. комунальні послуги

33.одноосібний постачальник товарів чи послуг

  1.  фінансувати, вкладати капітал

21.парламентський закон

34. не мати альтернативи

  1.  відповідно до нормативних критеріїв

22. основна схожість, подібність

35. захист, оборона

  1.  охорона здоров’я

23. загальна мета

36. дискусія, дебати

  1.  поліція

24. рада директорів

37. вести боротьбу політичними засобами

  1.  оборона

25. рада

  1.  соціальне забезпечення

26. бути призначеним

3. Are these statements true or false? Correct the false ones.

  1.  Public sector of the economy offers different kinds of goods and services to the consumers.
  2.  The state sometimes owns the land and capital needed for production and hire the necessary labour.
  3.  Public sector of the economy is not necessarily financed by the government.
  4.  Public company is a company whose shares you can buy on the stock exchange.
  5.  Public corporation is a business that is run by the government.
  6.  Every public corporation has a board.
  7.  The board interprets the general policy of the corporation.
  8.  A consumer organisation has the right to look after the interests of the customers.
  9.  Nationalised industries are the sole providers of a good or service.

4. Answer the questions.

  1.  What are two differences between the public and private sectors of industry?
  2.  Why is it useful to distinguish between the public and private sectors?
  3.  In what ways would a business in the public sector resemble an enterprise in the private sector?
  4.  Why does the fact that nationalised industries are monopolies cause some concern?

5. Write a summary of the text.

Text 10

Problems of production

Most consumers think producers reap huge profits from every market sale. Most producers wish that were true. The average producer earns a profit of only four to six cents on every sales dollar. And those profits don't come easily. Producers earn a profit only if they make the correct supply decisions. They have to keep a close eye on prices and costs and produce the right quantity at the right time. If they do all the right things, they might make a profit. Even when a producer does everything right, however, profits are not assured. Over 50,000 businesses failed in 1995, despite their owners' best efforts to make a profit.

We look at markets from the supply side, examining two distinct concerns. First, how much output can a firm produce? Second, how much output will it want to produce? As we'll see, the answers to these two questions are rarely the same. The capacity to produce is determined by resources and technology. By contrast, the choice of how much capacity to use is dictated by profit-and-loss considerations. If costs escalate as capacity is approached, it might make profit sense to produce less than capacity output. In some situations, the costs of production might even be so high that it doesn't make profit sense to produce any output from available facilities.

The question of how much can be produced is largely an engineering and managerial problem. The question of how much should be produced is an economic issue. The producer is confronted with a choice about resource utilization. That behavioral choice will be influenced by profit-and-loss calculations. The end result will be a supply decision, that is, an expressed ability and willingness to produce a good at various prices.

This chapter focuses on those supply decisions. We first look at the capacity to produce, then at how choices are made about how much to supply. The analysis revolves around three questions:

• What limits a firm's ability to produce?

• What costs are incurred in producing a good?

• How do costs affect production decisions?

Once we have answered these questions, we will be able to make sense of supply decisions. We will then look at how supply and demand decisions come together in various markets to determine WHAT goods are produced, HOW they are produced, and FOR WHOM.

1. Which of these statements expresses the main idea of the text?

  1.  Supply decisions are constrained by the capacity to produce and the costs of using that capacity.
  2.  Producers have to keep a close eye on prices.
  3.  A supply decision is an expressed ability and willingness to produce a good at various prices.
  4.  The question of how much should be produced is an economic issue.

2. Find in the text English equivalents of these words and phrases.

  1.  споживач

14. незважаючи на

27. протистояти

  1.  виробник

15. зусилля, спроба

28.використання ресурсів

  1.  пожинати (плоди)

16. продукція, випуск

29. впливати

  1.  величезний

17. рідко однаковий

30.підрахунок прибутків та збитків

  1.  ринковий продаж, збут

18. обсяг, об’єм

31. кінцевий результат

  1.  середній виробник

19. визначатися

32. здібність, здатність, уміння

  1.  отримувати прибуток

20. вибір

33. готовність

  1.  зробити правильний вибір

21. розгляд прибутків та збитків

34. виготовляти товар по різній ціні

  1.  необхідна кількість

22. витрати

35. зазнавати, підпадати

  1.  своєчасно

23.розширювати, розширити

36. впливати

  1.  отримувати прибуток

24. звертатися до

37. виробниче рішення

  1.  забезпечувати, переконувати

25. витрати виробництва

  1.  зазнавати невдачі

26. наявні можливості

3. Are these statements true or false? Correct the false ones.

  1.  Most producers earn huge profit from every market sale.
  2.  Supply decision is the ability and willingness to sell specific quantities of good at alternative prices in a given time period.
  3.  Profit greatly influences the production of any goods.
  4.  Production is the most important managerial problem.

4. Answer the questions.

  1.  When do producers earn a profit?
  2.  What is dictated by profit-and-loss consideration?
  3.  What is an engineering and managerial problem?
  4.  What is an economic issue?
  5.  What will be the end result?
  6.  When will we be able to make sense of supply decision?

5. Write a summary of the text.

Text 11

Capacity constraints

To supply goods and services to the market, you need more than ambition. No matter how large a business is or who owns it, all businesses confront one central fact: it costs something to produce goods. To produce corn, a farmer needs land, water, seed, equipment, and labor. To produce fillings, a dentist needs a chair, a drill, some space, and labor. Even the "production" of educational services (e.g., this economics class) requires the use of labor (your teacher), land (on which the school is built), and some capital (the building and blackboard). In short, unless you are producing unrefined, unpackaged air, you need factors of production – that is, resources that can be used to produce a good or service.

The factors of production used to produce a good or service provide the basic measure of economic cost. The costs of your economics class, for example, are measured by the amounts of land, labor, and capital it requires. These are resource costs of production.

An essential question for production is how many resources are actually needed to produce a given product. The answer depends on our technological know-how and how we organize the production process. At any moment, however, there is sure to be some minimum amount of resources needed to produce a good. Likewise, there will always be some maximum amount of output attainable from a given quantity of resources. These limits to the production of any good are reflected in the production function. The production function tells us the maximum amount of good X producible from various combinations of factor inputs. With one chair and one drill, a dentist can fill a maximum of 32 cavities per day. With two chairs, a drill, and an assistant, a dentist can fill up to 55 cavities per day.

A production function is a technological summary of our ability to produce a particular good. Table 1 provides a partial glimpse of one such function. In this case, the desired output is designer jeans, as produced by Tight Jeans Corporation. The essential inputs in the production of jeans are land, labor (garment workers), and capital (a factory and sewing machines). With these inputs, Tight Jeans can produce and sell fancy jeans to status-conscious consumers.

As in all production endeavors, we want to know how many pairs of jeans we can produce with available resources. To make things easy, we shall assume that the factory is already built, with fixed space dimensions. The only inputs we can vary are labor (the number of garment workers per day) and additional capital (the number of sewing machines we lease per day).

As you would expect, the quantity of jeans we can produce depends on the amount of labor and capital we employ. The purpose of a production function is to tell us just how much output we can produce with varying amounts of factor inputs. Table 5.1 provides such information for jeans production.

Table 1

A Production Function

(pairs of jeans per day)

A production function tells us the maximum amount of output attainable from alternative combinations of factor inputs. This particular function tells us how many pairs of jeans we can produce in a day with a given factory and varying quantities of capital and labor. With one sewing machine, and one operator, we can produce a maximum of 15 pairs of jeans per day, as indicated in the second column of the second row. To produce more jeans, we need more labor or more capital.

Consider the simplest option, that of employing no labor or capital (the upper left corner of Table 1). An empty factory cannot produce any jeans; maximum output is zero per day. The lesson here is quite simple: no inputs, no outputs. Even though land, capital (an empty factory), and even denim are available, some essential labor and capital inputs are missing, and jeans production is impossible.

Suppose now we employ some labor (a machine operator) but do not lease any sewing machines. Will output increase? Not according to the production function. The first row of Table 1 illustrates the consequences of employing labor without any capital equipment. Without sewing machines (or needles or other equipment), the operators cannot make jeans out of denim. Maximum output remains at zero, no matter how much labor is employed in this case.

The dilemma of machine operators without sewing machines illustrates a more general principle of production. The output of any factor of production depends on the amount of other resources available to it. Industrious, hardworking machine operators cannot make designer jeans without sewing machines.

We can increase the productivity of garment workers by providing them with machines. The production function again tells us by how much jeans output could increase if we leased some sewing machines. Suppose we leased just one machine per day. Now the second row of Table 1 is the relevant one. It says jeans output will remain at zero if we lease one machine but employ no labor. If we employ one machine and one worker, however, the jeans will start rolling out the front door. Maximum output under these circumstances (row 2, column 2) is 15 pairs of jeans per day. Now we're in business!

The remaining columns of row 2 tell us how many additional jeans we can produce if we hire more workers, still leasing only one sewing machine. With one machine and two workers, maximum output rises to 34 pairs per day. If a third worker is hired, output could increase to 44 pairs.

This information on our production capabilities is illustrated in Figure 5. The production function drawn here mirrors the second row of Table 1, where only one sewing machine is available. Point A illustrates the cold, hard fact that we can't produce any jeans without some labor. Points B through I show how production increases as additional labor is employed.

Efficiency Every point on the production function in Figure 5 represents the most output we could produce with a given number of workers. Point D, for example, tells us we could produce as many as 44 pairs of jeans with three workers. We must recognize, however, that we might also produce less. If the workers goof off or the sewing machines aren't maintained well, total output might be less than 44 pairs per day. In that case, we wouldn't be making the best possible use of scarce resources: we would be producing inefficiently. In Figure 5 this would imply a rate of output below point D. Only if we produce with maximum efficiency will we end up at point D or some other point on the production function.

Capacity Every point on the production function tells us how much output we could produce with a given amount of input – using our inputs efficiently. We could not keep increasing output forever, however, by hiring more workers. We have other production constraints. In this case, we have only a small factory and one sewing machine. If we keep hiring workers, we will quickly run out of space and available equipment. Land and capital constraints place a ceiling on potential output.

Notice in Figure 5 how total output peaks at point G. We can produce a total of 51 pairs of jeans at that point by employing six workers. What happens if we hire still more workers? According to Figure 5, if we employed a seventh worker, total output would not increase further. At point H, total output is 51 pairs, just as it was at point G, when we hired only six workers.

Figure 5

In the short run some inputs (e.g., land, capital) are fixed in quantity. Output then depends on how much of a variable input (e.g., labor) is used. The short-run production function shows how output changes when more labor is used. This figure is based on the second (one-machine) row of Table 5.1.

Short-Run Production Function 

Were we to hire an eighth worker, total jeans output would actually decline, as illustrated by point I. An eighth worker would actually reduce total output by-increasing congestion on the factory floor, delaying access to the sewing machine, and just plain getting in the way. Given the size of the factory and the availability of only one sewing machine, no more than six workers can be productively employed. Hence, the capacity production of this factory is 51 pairs of jeans per day. We could hire more workers, but output would not go up.

1. Which of these statements expresses the main idea of the text?

  1.  A production function indicates how much output can be produced from available facilities, using different amounts of variable inputs.
  2.  Factors of production are resource inputs used to produce goods and services.
  3.  Land and capital constraints place a ceiling on potential output.
  4.  To supply goods and services to the market, you need factors of production.

2. Find in the text English equivalents of these words and phrases.

  1.  постачати товари

18. головна проблема

35. відповідний

  1.  честолюбство, прагнення

19. дійсно необхідний

36. здатність, здібність

  1.  володіти бізнесом

20. залежати від

37. скотити(ся)

  1.  протистояти

21. технологічне ноу-хау

38. неефективно

  1.  зерно

22. виробничий процес

39. містити в собі; значити

  1.  насіння, зерно

23. подібно, так само

40.ефективність, продуктивність

  1.  обладнання, устаткування

24. досяжний

41. не вистачати місця

  1.  пломбувати (зуби)

25. порожнина

42. максимальний випуск продукції

  1.  свердло, бур

26. проблиск

43. досягти вершини

  1.  освітянські послуги

27. модний, вишуканий

44. перемінні витрати

  1.  коротко кажучи

28. змагання, зусилля

45.зменшуватися, занепадати

  1.  неочищений

29. обмежені розміри помешкання

46.скорочувати, зменшувати

  1.  розпакований

30. додатковий капітал

47.перенаселеність, скупчення

  1.  фактори виробництва

31. вибір

48. доступ, прохід

  1.  виробляти продукт

32. наслідок, результат

49. обсяг, об’єм

  1.  надавати послугу

33. голка

  1.  витрати виробництва

34.працьовитий, старанний

3. Are these statements true or false? Correct the false ones.

  1.  To supply goods and services we need factors of production.
  2.  Sometimes it costs nothing to produce goods and services.
  3.  The basic measure of economic costs is the size of business.
  4.  The ownership is the essential question for production.
  5.  To produce a given product we need many resources.
  6.  The production process depends on the advance technologies.
  7.  To produce goods and services you need factors of production.
  8.  The basic measure of economic cost depends on the factors of production.
  9.  The increase of productivity depends on good equipment.
  10.  To produce with maximum efficiency we need good equipment.
  11.  Supply decisions are constrained by the capacity to produce and the costs of using that capacity.
  12.  In the short run, some inputs (e.g., land and capital) are fixed in quantity.
  13.  Increases in (short-run) output result from more use of variable inputs (e.g., labour).
  14.  Every point on the production function represents efficient production.
  15.  Capacity output refers to the maximum quantity that can be produced from a given facility.

4. Answer the questions.

  1.  What does the production function tell us about?
  2.  What is a production function?
  3.  What is the purpose of a production function?
  4.  What can help the increase of productivity?
  5.  What can help the additional productivity?
  6.  What can help the efficient productivity?
  7.  What constraints influence the output?

5. Write key words and phrases to each paragraph of the text.

Text 12

Marginal Physical Product

The land and capital constraints that limit output have some interesting effects on the productivity of individual workers. Consider that seventh worker at the jeans factory. If he were hired, total output would not increase. Accordingly, that seventh worker contributes nothing to total input.

The contribution of each worker to production is measured by the change in total output that results when the worker is employed. The name for this concept is marginal physical product (MPP) and is measured as

In this case, total output doesn't change when the seventh worker is hired, so his MPP equals zero.

Contrast that experience with that of the first worker hired. Notice again what happens when the first worker is employed at the jeans factory: total output jumps from zero (point A) to 15 pairs of jeans per day (point B). This increase in output reflects the marginal physical product (MPP) of that first worker – that is, the change in total output that results from employment of one more unit of (labor) input.

If we employ a second operator, jeans output more than doubles, to 34 pairs per day (point C). Whereas the marginal physical product of the first worker was only 15 pairs, a second worker increases total output by 19 pairs.

The higher MPP of the second worker raises a question about the first. Why was the first’s MPP lower? Laziness? Is the second worker faster, less distracted, or harder working?

The higher MPP of the second worker is not explained by superior talents or effort. We assume in this exercise that all "units of labor" are equal — that is, one worker is just as good as another. Their different marginal products are explained by the structure of the production process, not by their respective abilities. The first garment worker had not only to sew jeans but also to unfold bolts of denim, measure the jeans, sketch out the patterns, and cut them to approximate size. A lot of time was spent going from one task to another. Despite the worker's best efforts (and assuming perfect efficiency), this person simply could not do everything at once.

A second worker alleviates this situation. With two workers, less time is spent running from one task to another. Now there is an opportunity for each worker to specialize a bit. While one is measuring and cutting, the other can continue sewing. This improved ratio of labor to other factors of production results in the large jump in total output. The superior MPP of the second worker is not unique to this person: it would have occurred even if we had hired the workers in the reverse order. What matters is the amount of other factors of production each unit of labor must work with.

1. Formulate the main idea of the text.

2. Find in the text English equivalents of these words and phrases.

  1.  впливати на продуктивність

12. випливати, виходити

23. рулон

  1.  наймати

13. зайнятість

24. міряти, вимірювати

  1.  сумарний випуск продукції

14.подвоювати, збільшувати удвічі

25. робити ескіз

  1.  збільшуватися

15. підняти питання

26. розкроювати

  1.  відповідно

16. збентежений, збитий з пантелику

27.полегшувати, пом’якшувати

  1.  траплятися, ставатися

17. талант

28. слушна нагода, сприятлива можливість

  1.  граничний продукт

18. зусилля, спроба

29. спеціалізуватися

  1.  кількість

19.структура виробничого процесу

30. коефіцієнт

  1.  витрати

20. робітник, що виготовляє одяг

31.кращий, вищої якості

  1.  збільшитися з… до

21. шити

32. зворотний

  1.  відбивати, відображати

22.розгортати, розстеляти

3. Are these statements true or false? Correct the false ones.

  1.  The change in total output associated with one additional unit of output is marginal physical product.
  2.  The land and capital limitations always influence on the productivity of individual workers.
  3.  We can increase output only if we hire more workers.
  4.  The productivity never depends on the number of workers.

4. Answer the questions.

  1.  How can different marginal products be explained?
  2.  How is the improved ratio of labor connected with the large jump in total output?

5. Write a summary of the text.

Text 13

Law of diminishing returns

Unfortunately, these large increases in output cannot be maintained as still more workers are hired. Look what happens when a third worker is hired. Total jeans production continues to increase. But the increase from point C to point D in Figure 5.1 is only 10 pairs per day. Hence the MPP of the third worker (10 pairs) is less than that of the second (19 pairs). Marginal physical product is diminishing.

What accounts for this decline in MPP? The answer again lies in the ratio of labor to other factors of production. A third worker begins to crowd our facilities. We still have only one sewing machine. Two people cannot sew at the same time. As a result, some time is wasted as the operators wait for their turns at the machine. Even if they split up the various jobs, there will still be some downtime, since measuring and cutting are not as time-consuming as sewing. In this sense, we cannot make full use of a third worker. The relative scarcity of other inputs (capital and land) constrains the marginal physical product of labor.

Resource constraints are even more evident when a fourth worker is hired. Total output increases again, but the increase this time is very small. With three workers, we got 44 pairs of jeans per day (point D); with four workers, we get a maximum of 48 pairs (point E). Thus the marginal physical product of the fourth worker is only 4 pairs of jeans. A fourth worker really begins to strain our productive capacity to the limit. There simply aren't enough machines to make productive use of so much labor.

If a seventh worker is hired, the operators get in each other's way, argue, and waste denim. As we observed earlier, total output does not increase at all when a seventh worker is hired. The MPP of the seventh worker is zero. The seventh worker is being wasted, in the sense that she contributes nothing to total output. This waste of scarce resources (labor) was commonplace in communist countries, where everyone was guaranteed a job. At Tight Jeans, however, they do not want to hire someone who doesn't contribute to output. And they certainly wouldn't want to hire an eighth worker, since total output actually declines from 51 pairs of jeans (point H in Figure 5.1) to 47 pairs (point I) when an eighth worker is hired. In other words, the eighth worker has a negative MPP.

The problem of crowded facilities applies to most production processes. In the short run, a production process is characterized by a fixed amount of available land and capital. Typically, the only factor that can be varied in the short run is labor. Yet, as more labor is hired, each unit of labor has less capital and land to work with. This is simple division: the available facilities are being shared by more and more workers. At some point, this constraint begins to pinch. When it does, marginal physical product starts to decline. This situation is so common that it is the basis for an economic principle: the law of diminishing returns. This law says that the marginal physical product of any factor of production (e.g., labor) will begin to diminish at some point, as more of it is used in a given production setting.

The limited availability of space or equipment is the cause of diminishing returns. Once we have purchased or leased a specific factory, it sets a limit to current jeans production. When such commitments to fixed inputs (e.g., the factory) exist, we are dealing with a short-run production problem. If no land or capital were in place — if we could build or lease any size factory — we would be dealing with a long-run decision. In the long run we might also learn new and better ways of making jeans and so increase our production capabilities. For the time being, however, we must accept the fact that the production function in Figure 5.1 defines the short-run limits to jeans production. Our short-run objective is to make the best possible use of the factory we have acquired.

1. Which of these statements expresses the main idea of the text?

  1.  The marginal physical product of a variable input declines as more of it is employed with a given quantity of other (fixed) inputs.
  2.  The limited availability of space and equipment is the cause of diminishing returns.
  3.  Short run is the period in which the (quality) of some inputs cannot be changed.
  4.  Large increases in output cannot be maintained as still more workers are employed.


2. Find in the text English equivalents of these words and phrases.

  1.  підтримувати, утримувати

11. час простою

21. обмежувати

  1.  зменшуватися

12. дефіцит, недостача

22. закон зменшуваної доходності

  1.  причина, підстава

13. очевидний, явний

23. причина

  1.  занепад, спад

14. напружувати(ся), натягати

24. купувати

  1.  коефіцієнт співвідношення робочої сили до інших факторів виробництва

15.виробнича потужність

25. здавати (брати) в оренду

  1.  тіснитися

16. робити вклад, сприяти

26. вручення

  1.  виробничі приміщення

17. загальне місце

27. постійні витрати

  1.  марнувати час

18. виробничий процес

28.виробнича спроможність

  1.  чекати своєї черги

19. підрозділ, відділ

29. одержувати

  1.  розділяти на частини

20.ділити(ся), розподіляти

3. Are these statements true or false? Correct the false ones.

  1.  Output tends to increase at a diminishing rate when more labor is employed in a given facility.
  2.  Additional workers "crowd" existing facilities, leaving each worker with less space and-machinery to work with.
  3.  The problem of crowded facilities applies to some production processes.
  4.  As less labor is hired, each unit of labor has more capital and land to work with.
  5.  The law of diminishing returns says that the marginal physical product of any factor of production will begin to diminish at some point.
  6.  One of the long-run objectives is to make the best possible use of the factory.

4. Find in the right column definitions of the terms.

  1.  supply
  2.  factors of production
  3.  production function
  4.  marginal physical product
  5.  law of diminishing returns
  6.  short-run
  7.  long-run

  1.  The marginal physical product of a variable input declines as more of it is employed with a given quantity of other fixed inputs.
    1.  The change in total output associated with one additional unit of input.
    2.  The period in which the quantity and quality of some inputs cannot be changed.
    3.  The ability and willingness to sell (produce) specific quantities of a good at alternative price in a given time period.
    4.  Resources inputs used to produce goods and services.
    5.  A technological relationship expressing the minimum quantity of a good attainable from different combinations of factors inputs.
    6.  A period of time long enough for all inputs to be varied.

5. Write a summary of the text.

Text 14

Costs of production

A production function tells us how much output a firm could produce with its existing plant and equipment. It doesn't tell us how much the firm will want to produce, however. The level of desired output depends on prices and costs. A firm might want lo produce at capacity if the profit picture were bright enough. On the other hand, a firm might not produce any output if costs always exceeded sales revenue. The most desirable rate of output is the one that maximizes total profit — the difference between total revenue and total costs.

The production function, then, is just a starting point for supply decisions. To decide how much output to produce with that function, a firm must next examine the dollar costs of production.

Total cost  The total cost of producing a product includes the market value of all the resources used in its production. To determine this cost we simply identify all the resources used in production, compute their value, then add everything up.

In the production of jeans, these resources include land, labor, and capital. Table 2 identifies these resources, their unit values, and the total costs associated with their use. This table is based on an assumed output of 15 pairs of jeans per day, with the use of one machine operator and one sewing machine (point B in Figure 5). The rent on the factory is $100 per day, a sewing machine costs $20 per day, the wages of a garment worker are $80 per day. We shall assume Tight Jeans Corporation can purchase bolts of denim for $30 apiece, each of which provides


Table 2

The Total Costs of Production

(total cost of producing 15 pairs of jeans per day)

The total cost of producing a good equals the market value of all the resources used in its production. In this case, we have assumed that the production of 15 pairs of jeans per day requires resources worth $245.

enough denim for 10 pairs of jeans. In other words, one-tenth of a bolt ($3 worth of material) is required for one pair of jeans. We shall ignore any other potential expenses. With these assumptions, the total cost of producing 15 pairs of jeans per day amounts to $245, as shown in Table 2.

Total costs will change, of course, as we alter the rate of production. But not all costs increase. In the short run, some costs don't increase at all when output is increased. These are fixed costs, in the sense that they do not vary with the rate of output. The factory lease is an example. Once you lease a factory, you are obligated to pay for it, whether you use it or not. The person who owns the factory wants $100 per day, whether you produce any jeans or not. Even if you produce no jeans, you still have to pay the rent. That is the essence of fixed costs.

The leased sewing machine is another fixed cost. When you rent a sewing machine, you must pay the rental charge. It doesn't matter whether you use it for a few minutes or all day long — the rental charge is fixed at $20 per day.

Labor costs are another story altogether. The amount of labor employed in jeans production can be varied easily. If we decide not to open the factory tomorrow, we can just tell our only worker to take the day off. We will still have to pay rent, but we can cut back on wages. On the other hand, if we want to increase daily output, we can also get additional workers easily and quickly. Labor is regarded as a variable cost in this line of work — that is, a cost that varies with the rate of output.

The denim itself is another variable cost. Denim not used today can be saved for tomorrow. Hence how much we "spend" on denim today is directly related to how many jeans we produce. In this sense, the cost of denim input varies with the rate of jeans output.

Figure 5 illustrates how these various costs are affected by the rate of production. On the vertical axis are the costs of production, in dollars per day. Notice that the total cost of producing 15 pairs per day is still $245, as indicated by point B. This figure consists of $120 of fixed costs (factory and sewing machine rents) and $125 of variable costs ($80 in wages and $45 for denim). If we increase the rate of output, total costs will rise. How fast total costs rise depends on variable costs only, however, since fixed costs remain at $120 per day. (Notice the horizontal fixed cost curve in Figure 5.)

With one sewing machine and one factory, there is an absolute limit to daily jeans production. The capacity of a factory with one machine is roughly 51 pairs of jeans per day. If we try to produce more jeans than this by hiring additional workers, our total costs will rise, but our output will not. In fact, we could fill the factory with garment workers and drive total costs sky-high. But the limits of space and one sewing machine do not permit output in excess of 51 pairs per day. This limit to productive capacity is represented by point G on the total cost curve. Further expenditure on inputs will increase production costs but not output.

Although there is no upper limit to costs, there is a lower limit. If output is reduced to zero, total costs fall only to $120 per day, the level of fixed costs. This is illustrated by point A in Figure 6. As before, there is no way to avoid fixed costs in the short run.

Figure 6

The Costs of Jeans Production

Total cost includes both fixed and variable costs. Fixed costs must be paid even if no output is produced (point A). Variable costs start at zero and increase with the rate of output. The total cost of producing 15 pairs of jeans (point B) includes $120 in fixed costs (rent on the factory and sewing machines) and $125 in variable costs (denim and wages). Total cost rises as output increases, because additional variable costs must be incurred.

In this example, the short-run capacity is equal to 51 pairs (point G). If still more inputs are employed, costs will rise but not total output.

1. Which of these statements expresses the main idea of the text?

  1.  The total cost of producing a good equals the market value of all the resources used in its production.
  2.  Total cost rises as output increases.
  3.  Costs of production do not change when the rate of output is altered.
  4.  The amount of labor employed in the production can be varied easily.

2. Find in the text English equivalents of these words and phrases.

  1.  ціна

14. витрати, пов’язані з

27. суть, сутність

  1.  витрати

15. наймати або здавати в оренду

28. витрати на робочу силу

  1.  прибуток

16. заробітна плата робітників

29. взяти вихідний день

  1.  перевищувати доходи від продажу

17. вважати

30.зниження, скорочення

  1.  максимізувати валовий прибуток

18. рулон

31.добова продуктивність

  1.  точка відліку

19. ігнорувати

32. перемінні витрати

  1.  рішення про поставки

20. потенційні витрати

33. отже

  1.  розглядати

21. припущення

34. залишатися

  1.  містити в собі, включати

22. становити (суму)

35. приблизно

  1.  ринкова вартість, біржова ціна

23. змінювати рівень виробництва

36. високий

  1.  визначати, вирішувати

24. постійні витрати

37. надлишок, крайність

  1.  установлювати, розпізнавати

25. бути зобов’язаним

38. витрати

  1.  обчислювати, підраховувати

26. платити орендну плату (2)

3. Are these statements true or false? Correct the false ones.

  1.  Profit is a surplus generated by business activity.
  2.  The market value of all resources used to produce a good or service is total cost.
  3.  The costs of production include both fixed and variable costs.
  4.  Fixed costs (e.g., space and equipment leases) are incurred even if no output is produced.
  5.  Fixed costs are costs of production that change when the rate of output is altered.
  6.  There are no fixed costs in the long run since all inputs are variable and hence their costs are variable.
  7.  Fixed costs remain the same regardless of the level of production.
  8.  Variable costs are costs of production that remain the same when the rate of output is altered.
  9.  Variable costs are costs that change as output changes.
  10.  Variable costs (e.g., labor and material) are incurred when plant and equipment are put to use.
  11.  Variable costs start at zero and increase with the rate of output
  12.  Total cost rises as output increases, because additional variable costs must be incurred.

4. Answer the questions.

  1.  What does and doesn't a production function tell us?
  2.  What does the level of desired output depend on?
  3.  What is the most desirable rate of output?
  4.  What is the starting point for supply decisions?
  5.  How to determine the total cost of producing a product?
  6.  Do all total costs change when the rate of production is altered?
  7.  What factor of production is regarded as a variable cost?
  8.  What is the way to avoid fixed costs in the short-run?

5. Write key words and phrases to each paragraph of the text.

Text 15

Average costs

The different nature of fixed and variable costs raises some intriguing questions about how to measure the cost of producing a pair of jeans. In figuring how much it costs to produce one pair, should we look only at the denim and labor time used to produce that pair? Or should we also take into account the factory rent and lease payments on the sewing machines?

A similar problem arises when you try to figure out whether a restaurant overcharges you for a steak dinner. What did it cost the restaurant to supply the dinner? Should only the meat and the chef’s time be counted? Or should the cost include some portion of the rent, the electricity, and the insurance?

The restaurant owner, too, needs to figure out which measure of cost to use. She has to decide what price to charge for the steak. She wants to earn a profit. Can she do so by charging a price just above the cost of meat and wages? Or must she charge a price high enough to cover some portion of all her fixed costs as well?

Before deciding which costs are most important for production and pricing decisions, we need to clarify a couple of key cost measures. We will focus on two: average cost and marginal cost.

Average total cost (ATC) is simply total cost divided by the rate of output; that is

If the total cost of supplying 10 steaks is $62, then the average cost of the steaks is $6.20.

As we observed in Figure 5.2, total costs change as the rate of output increases. Hence, both the numerator and the denominator in the ATC formula change with the rate of output. This complicates the arithmetic a bit, as Figure 7 illustrates.

Figure 7

Average Costs

Average total cost (ATC) in column 5 equals total cost (column 4) divided by the rate of output (column 1). ATC tends to fall initially, then later rise. This gives the ATC curve a U shape, as illustrated in the graph.

Figure 7 shows how average costs change as the rate of output varies. Row J of the cost schedule, for example, again indicates the fixed, variable, and total costs of producing 15 pairs of jeans per day. Fixed costs are still $120 (for factory and machine rentals); variable costs (denim and labor) are $125. Thus the total cost of producing 15 pairs per day is $245. The average cost for this rate of output is simply total cost ($245) divided by quantity (15), or $16.33 per day. This ATC is indicated in column 5 of the table and by point J on the graph.

An important feature of the ATC curve is its shape. Average costs start high, fall, then rise once again, giving the ATC curve a distinctive U shape.

The initial decline in ATC is largely due to fixed costs. At low rates of output, fixed costs are a high proportion of total costs. Quite simply, it's very expensive to lease (or buy) an entire factory to produce only a few pairs of jeans. The entire cost of the factory must be averaged out over a small quantity of output. This results in a high average cost of production. To reduce average costs, we must make fuller use of our leased plant and equipment.

The same problem of cost spreading would affect a restaurant that only served two dinners a day. The total cost of operating a restaurant might easily exceed $500 a day. If only two dinners were served, the average total cost of each meal would exceed $250. That's why restaurants need a high volume of business to keep meal prices low.

As output increases, the fixed costs of production are distributed over an increasing quantity of output. Fixed costs no longer dominate total costs as production increases (compare columns 2 and 3 in Figure 7). As a result, average total costs tend to decline.

Average total costs don't fall forever, however. They bottom out at point M in Figure 7, then start rising. What accounts for this turn around?

1. Formulate the main idea of the text.

2. Find in the text English equivalents of these words and phrases.

  1.  середні витрати

12. давати прибуток

23. форма, обрис

  1.  інтригуючі питання

13. з'ясовувати, вносити ясність

24. відповідно до

  1.  міряти, вимірювати

14. граничні витрати

25. скоротити

  1.  брати до уваги

15. підпадати, зазнавати

26. середні витрати

  1.  аналогічна проблема

16.загальна продуктивність

27. впливати на щось

  1.  обчислювати

17. повна собівартість

28.перевершувати, перевищувати

  1.  правити надмірну ціну

18. числівник

29.розподіляти, поширювати

  1.  брати до уваги

19. знаменник

30.панувати, переважати

  1.  електрика

20. ускладнювати(ся)

31. дійти до суті чогось

  1.  страхування

21. крива

  1.  назначати ціну

22.відмітний, характерний

3. Are these statements true or false? Correct the false ones.

  1.  Average cost is simply total cost divided by the quantity produced.
  2.  The ATC curve is typically U shaped.
  3.  ATC tends to rise initially, then later fall.
  4.  The initial decrease in average total cost is always due to fixed costs.
  5.  It’s not very costly to purchase an entire factory to produce only a few pairs of jeans.
  6.  Fixed costs dominate total costs as production grows.
  7.  Average total costs don’t drop forever.


4. Answer the questions.

  1.  Why the shape is an important feature of average total cost curve?
  2.  What costs tent to decline?

5. Write a summary of the text.

Text 16

Marginal cost

The upturn of the ATC curve is caused by rising marginal costs. Marginal cost (MC) refers to the change in total costs when one more unit of output is produced. In practice, marginal cost is easy to measure; just observe how much total costs increase when one more unit of output is produced. For larger increases in output, marginal cost can also be approximated by the formula

  •  Marginal cost =  change in total cost

    change in total output

Using this formula and Figure 7 we could confirm how marginal costs rise in jeans production. As jeans production increases from 20 pairs (row K) to 30 pairs (row L) per day, total costs rise from $270 to $360. Hence, the change in total cost ($90) divided by the change in total output (10) equals $9. This is the marginal cost of jeans in that range of output (20 to 30 pairs).

As output continues to increase further from 30 to 40 pairs per day, marginal costs rise. Total cost rises from $360 (row L) to $470 (row M), a change of $110. Dividing this by the change in output (10) reveals that marginal cost is now $11. Marginal costs are rising as output increases.

Rising marginal cost implies that each additional unit of output becomes more expensive to produce. Why is this? Why would a third pair of jeans cost more to produce than a second pair did? Why would it cost a restaurant more to serve the twelfth dinner than the eleventh dinner?

Figure 8

The Marginal Cost Curve

Marginal cost (MC) is the increase in total cost resulting from a one-unit increase in the rate of production. MC is the additional cost of producing one more unit. These hypothetical numbers indicate that total cost increases from $25 to $34 when a fifth unit is produced (compare rows u and t). Hence the MC of the fifth unit is $9, as illustrated by point u on the marginal cost curve. The MC curve generally rises (as a consequence of the law of diminishing returns).

The explanation for this puzzle of rising marginal cost lies in the production function. As we observed earlier, output increases at an ever slower pace as capacity is approached. The law of diminishing marginal product tells us that we need an increasing amount of labor to eke out each additional pair of jeans. The same law applies to restaurants. As more dinners are served, the waiters and cooks get pressed for space and equipment. It takes a little longer (and, hence, more wages) to prepare and serve each meal. Hence, the marginal costs of each meal increase as the number of patrons rises.

The MC Curve.  Figure 8 illustrates a simplified marginal cost curve. In this case, output increases one unit at a time. This makes it easier to see how costs change with a single unit of added output. Notice in the table what happens to total cost when output increases from 3 units (row s) to 4 units (row t). Total cost increases from $19 to $25, yielding a marginal cost of $6 for the fourth unit. This marginal cost is illustrated by point t on the graph. The remaining points show how marginal costs increase at higher rates of output.

1. Which of these statements expresses the main idea of the text?

  1.   Rising marginal cost implies that each additional unit of output becomes more expensive to produce.
  2.  Marginal costs are rising as output increases.
  3.  Marginal cost is the increase in total cost associated with a one-unit increase in production.
  4.  The explanation of rising marginal cost lies in the production function.


2. Find in the text English equivalents of these words and phrases.

  1.  спрямований угору

8.номенклатура продукції

15. поповнювати

  1.  граничні витрати

9. показувати, виявляти

16. звертатися з проханням, просити

  1.  стосуватися, відсилати до

10. значити, мати значення

17. опікування

  1.  легко вимірювати

11. подавати обід

18. спрощений

  1.  спостерігати, помічати

12. гіпотетичний

19. давати прибуток

  1.  наближений

13. бути розташованим

  1.  підтверджувати

14. повільно

3. Are these statements true or false? Correct the false ones.

  1.  Marginal cost is the increase in total cost that results when one more unit of output is produced.
  2.  Marginal cost is the cost of changing the level of output by on unit.
  3.  The normal shape of a marginal cost curve is a U-shape.
  4.  Marginal costs increase because of diminishing returns in production.
  5.  The marginal cost curve never rises.
  6.  Rising marginal cost means that each extra unit of product becomes more costly to produce.

4. Answer the questions.

  1.  How is it possible to measure marginal cost?
  2.  What is the formula of marginal cost?

5. Write a summary of the text.

Text 17

The relationship of marginal cost to average total cost

Figure 9 brings together the average and marginal cost curves. The centerpiece of Figure 9 is the U-shaped ATC curve. What is of special significance is its relationship to marginal costs. Notice that the MC curve intersects the ATC curve at its lowest point (point m). This will always be the case. So long as the marginal cost of producing one more unit is less than the previous average cost, average costs must fall. Thus average costs decline as long as the marginal cost curve lies below the average cost curve, as to the left of point m in Figure 9.

We have already observed, however, that marginal costs themselves tend to rise as output expands, largely because additional workers reduce the amount of land and capital available to each worker (in the short run, the size of plant and equipment is fixed). Consequently, at some point (m in Figure 9) marginal costs will rise to the level of average costs.

As marginal costs continue to rise beyond point m, they begin to pull average costs up, giving the average cost curve its U shape. Average costs increase whenever marginal costs exceed average costs. This is the case to the right of point m, since the marginal cost curve always lies above the average cost curve in that part of Figure 9.

Figure 9

Basic Cost Curves

With total cost and the rate of output, all other cost concepts can be computed. The MC curve typically rises, sometimes after a brief decline. The ATC curve has a U shape. And the MC curve will always intersect the ATC curve at its lowest point (m).

Table 3

A guide to costs

Total costs of production include fixed costs and variable costs:

TC=FC+VC

Dividing total costs by the quantity of output yields the average total cost:

ATC=TC/q

The most important measure of changes in cost is marginal cost, which equals the increase in total costs when one additional unit of output is produced:

To visualize the relationship between marginal cost and average cost, imagine computing the average height of people entering a room. If the first person who comes through the door is 6 feet tall, then the average height of people entering the room is 6 feet at that point. But what happens to average height if the second person entering the room is only 3 feet tall? Average height declines because the last (marginal) person entering the room is shorter than the previous average. Whenever the last entrant is shorter than the average, the average must fall.

The relationship between marginal costs and average costs is also similar to that between your grade in this course and your grade-point average. If your grade in economics is better (higher) than your other grades, then your overall grade-point average will rise. In other words, a high marginal grade will pull your average grade up. If you don't understand this, your grade-point average is likely to fall.

1. Which of these statements expresses the main idea of the text?

  1.  Average costs rise whenever marginal costs exceed average costs.
  2.  Marginal costs themselves tend to increase as production expands, largely because additional workers decrease the amount of land and capital available to each worker.
  3.  The MC curve typically increases, sometimes after a brief decline.
  4.  Marginal cost is the most important measure of changes in cost.

2. Find in the text English equivalents of these words and phrases.

  1.  об’єднувати

9. розширяти(ся)

17.перемінні витрати

  1.  крива

10.додатковий робітник

18.рівнятися, дорівнювати

  1.  середина

11. зупинятися

19. уявляти собі

  1.  значення

12. коли б не

20. підрахунок

  1.  перехрещувати(ся)

13. перевищувати

21. середній1 зріст

  1.  попередній

14. сукупні витрати виробництва

22. той, хто наймається на роботу

  1.  знижуватися

15. містити в собі, включати

23. оцінка

  1.  спускатися вниз

16. постійні витрати

3. Are these statements true or false? Correct the false ones.

  1.  Average costs decline as long as the marginal cost curve lies below the average cost curve.
  2.  All total costs increase with output.
  3.  The average fixed costs curve is downward sloping.
  4.  The average variable cost curve is U-shaped.

4. Answer the questions.

  1.  Why do marginal costs tend to rise?
  2.  When do average costs increase?
  3.  What are total costs of production?
  4.  What is the most important measure of changes in cost?
  5.  What is the relationship of marginal cost curve to average total cost?

5. Find in the right column definitions of the terms.

  1.  fixed costs
  2.  total costs
  3.  variable costs
  4.  average fixed costs
  5.  marginal costs
  6.  average total costs
  1.  costs which stay the same for a given period of time over a given output;
    1.  the increase in total cost associated with a one-unit increase in production;
    2.  total costs divided by the quantity produced in a given time period;
    3.  costs which vary with the level of production;
    4.  total costs divided by output;
    5.  the market value of all resources used to produce a good or service.

5. Write a summary of the text.

Text 18

Economic vs. accounting costs

An essential characteristic of the cost curves we have observed is that they are based on real production relationships. The dollar costs we compute are a direct reflection of underlying resource costs — the land, labor, and capital used in the production process. Not everyone counts this way. On the contrary, accountants and businesspeople typically count dollar costs only and ignore any resource use that doesn't result in an explicit dollar cost.

Return to Tight Jeans for a moment to see the difference. When we computed the dollar cost of producing 15 pairs of jeans per day, we noted the following resource inputs:

INPUTS                                    COST

1 factory rent                            @   $ 10

1 machine rent                          @      20

1 machine operator                      @      80

1.5 bolts of denim                      @_    45

Total cost                                       $245

The total value of the resources used in the production of 15 pairs of jeans was thus $245 per day. But this figure need not conform to actual dollar costs. Suppose the owners of Tight Jeans decided to sew jeans. Then they would not have to hire a worker or pay $80 per day in wages. Dollar costs would drop to $165 per day. The producers and their accountant would consider this to be a remarkable achievement. They would assert that the costs of producing jeans had fallen.

Economic cost An economist would draw no such conclusions. The essential economic question is how many resources are used in production. This has not changed. One unit of labor is still being employed at the factory; now it's simply the owners, not a hired worker. In either case, one unit of labor is not available for the production of other goods and services. Hence society is still paying $245 for jeans, whether the owners of Tight Jeans write checks in that amount or not. We really don't care who sews jeans — the essential point is that someone (i.e., a unit of labor) does.

The same would be true if Tight Jeans owned its own factory rather than rented it. If the factory was owned rather than rented, the owners probably would not write any rent checks. Hence accounting costs would drop by $100 per day. But society would not be saving any resources. The factory would still be in use for jeans production and therefore unavailable for the production of other goods and services. The economic (resource) cost of producing 15 pairs of jeans would still be $245.

The distinction between an economic cost and an accounting cost is essentially one between resource and dollar costs. Dollar cost refers to the actual dollar outlays made by a producer; it is the lifeblood of accountants. Economic cost, in contrast, refers to the dollar value of all resources used in the production process; it is the lifeblood of economists. The accountant's dollar costs are usually explicit, in the sense that someone writes a check. The economist takes into consideration implicit costs as well, that is, even those costs for which no direct payment is made. In other words, economists count costs as

  •  Economic cost =: explicit costs + implicit costs

As this formula suggests, economic and accounting costs will diverge whenever any factor of production is not paid an explicit wage (or rent, etc.).

The Cost of Homework. These distinctions between economic and accounting costs apply also to the "production" of homework. You can pay people to write term papers for you, and at large schools you can often buy lecture notes. But most students end up doing their own homework, so that they will learn something and not just turn in required assignments.

Doing homework is expensive, however, even if you don't pay someone to do it. The time you spend reading this chapter is valuable. You could be doing something else if you weren't reading right now. What would you be doing? The forgone activity – the best alternative use of your time – represents the economic cost of doing homework. Even if you don't pay yourself for reading this chapter, you'll still incur that economic cost.

1. Formulate the main idea of the text.

  1.  Find in the text English equivalents of these words and phrases.

  1.  .важлива характеристика

13. оренда фабрики

25. доларові планові капітальні витрати

  1.  крива витрат

14. загальна вартість ресурсів

26.невід’ємний елемент бухгалтерії

  1.  спостерігати, помічати

15. погоджуватися з загальною вартістю у доларовому еквіваленті

27. порівняно з

  1.  виробничі взаємовідношення

16. наймати робітника

28. явні витрати, зовнішні витрати

  1.  відображення

17. видатне досягнення

29. внутрішні витрати, наявні витрати

  1.  навпаки

18.заявляти, відстоювати права

30. іншими словами

  1.  брати до уваги, враховувати

19. в іншому випадку

31.відхилятися, розходитися

  1.  витрати у доларовому еквіваленті

20. наявний, придатний

32.необхідні асигнування

  1.  ігнорувати

21. отже

33.попередня діяльність

  1.  закінчуватися (чим)

22. виписати чек

34.представляти, являти (собою)

  1.  за день

23. рахунок витрат

  1.  помічати, звертати увагу

24. економічні витрати

3. Are these statements true or false? Correct the false ones.

  1.  The economic costs of production include the value of all resources used.
  2.  Accounting costs typically include only those dollar costs actually paid (explicit costs).
  3.  The cost curves are based on real production relationships.
  4.  Accounts and businessmen count both dollar costs and resource use.
  5.  How many resources are used in production is the main economic question.
  6.  The difference between an economic cost and an accounting cost is the difference between resource and dollar costs.
  7.  An accounting cost refers to dollar value of all resources used in the production process.
  8.  The economist does not take into consideration implicit costs.

4. Write a summary of the text.


Text 19

Supply horizon

All these cost calculations can give you a real headache. They can also give you second thoughts about jumping into Tight Jeans, restaurant management, or any other business. There are tough choices to be made. A given firm can produce many different rates of output, each of which entails a distinct level of costs. Someone has to choose which level of output to produce and thus how many goods to supply to the market. That decision has to be based not only on the capacity to produce (the production function) but also on the costs of production (the cost functions). Only those who make the right decisions will succeed in business.

The production decision The supply decision has two dimensions, a short-run horizon and a long- run horizon. The short run is characterized by the existence of fixed costs. A commitment has been made: a factory has been built, an office leased, or machinery purchased. The only decision to make is how much output to produce with these existing facilities. This is the production decision, the choice of how intensively to use available plant and equipment. This choice is typically made daily (e.g., jeans production), weekly (e.g., auto production), or seasonally (e.g., farming).

The most important factor in the production decision is marginal costs. Producers will be willing to supply output only if they can at least cover marginal costs. If the marginal cost of a pair of jeans is $11, then there is no profit in producing an additional pair unless the price of jeans is at least $11. Accordingly, the marginal cost curve is a basic determinant of short-run production decisions.

Marginal costs may also dictate short-run pricing decisions. Suppose the average cost of serving a steak dinner is $12, but the marginal cost is only $7. How low a price can the restaurant charge for the dinner? Ideally, it would like to charge at least $12 and cover all of its costs. It could at least cover marginal costs, however, if it charged only $7. At that price the restaurant would be no worse or better off for having served an extra dinner. The additional cost of serving that one meal would be covered. Such marginal cost considerations play a critical role in supply behavior.

The investment decision The long run opens up a whole new range of options. In the long run, we have no lease or purchase commitments. We are free to start all over again; with whatever scale of plant and equipment we desire. There are no fixed costs in the long run. Accordingly, long-run supply decisions are more complicated. If no commitments to production facilities have been made, a producer must decide how large a facility to build, buy, or lease. Hence the size (scale) of plant and equipment becomes an additional option for long-term supply decisions. In a long-run (no fixed costs) situation, a firm can make the investment decision.

Note that the distinction between short- and long-run supply decisions is not based on time. The distinction instead depends on whether commitments have been made. If no leases have been signed, no construction contracts awarded, no acquisitions made, a producer still has a free hand. With no fixed costs, the producer can walk away from the potential business at a moment's notice.

Once fixed costs are incurred, the options narrow. Then the issue becomes one of making the best possible use of the assets (e.g., factory, office space, equipment) that have been acquired. Once fixed costs have been incurred, it's hard to walk away from the business at a moment's notice. The goal then becomes to make as much profit as possible from the investments already made.

1. Formulate the main idea of the text.

2. Find in the text English equivalents of these words and phrases.

1. важкий вибір

2. рівень виробництва

11. короткострокова перспектива

20.покривати граничні витрати

3. визивати

12.довгострокова перспектива

21. відповідно

4. постачати на ринок

13. постійні витрати

22.вирішальний фактор, показник

5. здатність виробляти

14.доручення, зобов’язання

23. плата за

6. виробнича функція

15.наявні грошові засоби

24. додатковий обід

7.витрати виробництва

16.виробниче рішення

25.зобов’язання по замовленням

8. функція витрат

17.наскільки інтенсивно використовувати

26.рішення про інвестиції

9. наслідувати бізнес

18. граничні витрати

27. придбання

10. розмір, величина

19.постачати продукцію

28.приміщення офісу

3. Are these statements true or false? Correct the false ones.

  1.  The production decision is the short-run choice of how much output to produce with existing facilities.
  2.  At a minimum, a producer will be willing to supply output only if price at least covers marginal cost.
  3.  The long run is characterized by an absence of fixed costs.
  4.  In a short run decision a firm chooses among all possible production techniques.
  5.  The decision how many goods to supply to the market has to be based on the capacity to produce.
  6.  The investment decision entails the choice of whether to acquire fixed costs, that is, whether to build, buy, or lease plant and equipment.

4. Answer the questions:

  1.  Who will be succeeding in business?
  2.  What two dimensions does the supply have?
  3.  What is the short run characterized by?
  4.  What is the production decision?
  5.  What is the most important factor in the production decision?
  6.  What is the long – run characterized by?
  7.  What is the investment decision?
  8.  What is the distinction between short – and long – run supply decisions based on?

5. Write a summary of the text.

PAGE  2


 

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