Reading Comprehension Exercise, Text 1

The Basics of Economics

By Teacher Sarah and Teacher Keith

People must make choices because of scarcity, the fact that they don’t have enough resources to satisfy all their needs. Economics studies how people allocate resources amongst alternative uses. Macroeconomics studies national economies, and microeconomics studies the behavior of individual people and individual firms. Economists assume that people work towards maximizing their utility, or happiness, and firms act to maximize profits.

EYEING THE FOUR BASIC MARKET STRUCTURES

An industry consists of all firms making similar or identical products. An industry’s market structure depends on the number of firms in the industry and how they compete. Here are the four basic market structures:

• Perfect competition: Perfect competition happens when numerous small firms compete against each other. Firms in a competitive industry produce the socially optimal output level at the minimum possible cost per unit.
• Monopoly: A monopoly is a firm that has no competitors in its industry. It reduces output to drive up prices and increase profits. By doing so, it produces less than the socially optimal output level and produces at higher costs than competitive firms.
• Oligopoly: An oligopoly is an industry with only a few firms. If they collude, they reduce output and drive up profits the way a monopoly does. However, because of strong incentives to cheat on collusive agreements, oligopoly firms often end up competing against each other.
• Monopolistic competition: In monopolistic competition, an industry contains many competing firms, each of which has a similar or at least a slightly different product. Restaurants, for example, all serve food but of different types and in different locations. Production costs are above what could be achieved if all the firms sold identical products, but consumers benefit from the variety.

Questions:

1. What is the study of Economics?
2. What is Macroeconomics?
3. What is Microeconomics?
4. What do Economists assume?
5. What do industries in general consist of?
6. What are the four basic market structures?
7. What is the “Perfect Competition?"
8. What is a “monopoly?”
9. What is an “oligopoly?”
10. What is “Monopolistic Competition?”

Answers

1.   Economics studies how people allocate resources amongst alternative uses.
2.  Macroeconomics studies National economies.
3. Microeconomics studies the behaviour of individual people and individual firms.
4. Economists assume that people work towards maximizing their utility or happiness, and firms act to maximize profits.
5. An Industry consists of all firms making similar or identical products.
6. The four basic market structures are - Perfect competition, monopoly, oligopoly and monopolistic competition.
7. Perfect competition is when small firms compete against each other, each producing the optimal output level.
8. A monopoly is a firm that has no competitors in its industry and reduces output to drive up prices and increase profits.
9. An oligopoly is an industry with only a few firms.
10. Monopolistic competition is when an industry contains many competing firms, each of which produces similar or at least a slightly different product.