Economics

diminishing average returns see DIMINISHING RETURNS.

diminishing marginal rate of substitution see MARGINAL RATE OF SUBSTITUTION.

diminishing marginal returns see DIMINISHING RETURNS.

diminishing marginal utility a principle that states that as an individual consumes a greater quantity of a product in a particular time period, the extra satisfaction (UTILITY) derived from each additional unit will progressively fall as the individual becomes satiated with the product. See Fig. 45.

The principle of diminishing MARGINAL UTILITY can be used to explain why DEMAND CURVES for most products are downward sloping, since if individuals derive less satisfaction from successive units of the product they will only be prepared to pay a lower price for each unit.

Demand analysis can be conducted only in terms of diminishing marginal utility if CARDINAL UTILITY measurement is possible. In practice, it is not possible to measure utility precisely in this way, so demand curves are now generally constructed from INDIFFERENCE CURVES, which are based upon ORDINAL UTILITY. See CONSUMER EQUILIBRIUM, REVEALED PREFERENCE.

diminishing returns the law in the SHORT-RUN theory of supply of diminishing marginal returns or variable factor proportions that states that as equal quantities of one VARIABLE FACTOR INPUT are added into the production function (the quantities of all other factor inputs remaining fixed), a point will be reached beyond which the resulting addition to output (that is, the MARGINAL PHYSICAL PRODUCT of the variable input) will begin to decrease, as shown in Fig. 46.

As the marginal physical product declines, this will eventually cause AVERAGE PHYSICAL PRODUCT to decline as well (diminishing average returns). The marginal physical product changes because additional units of the variable factor input do not add equally readily to units of the fixed factor input.

Fig. 45 Diminishing marginal utility. To a hungry man the utility of the first slice of bread consumed will be high (O

) but as his appetite becomes satiated, successive slices of bread yield smaller and smaller amounts of satisfaction; for example, the fifth slice of bread yields only O

of additional utility.

At a low level of output, marginal physical product rises with the addition of more variable inputs to the (underworked) fixed input, the extra variable inputs bringing about a more intensive use of the fixed input.

Fig. 46 Diminishing returns. The rise and fall of units of output as units of variable factor input are added to the production function.

Eventually, as output is increased, an optimal factor combination is attained at which the variable and fixed inputs are mixed in the most appropriate proportions to maximize marginal physical product. Thereafter, further additions of variable inputs to the (now overworked) fixed input leads to a less than proportionate increase in output so that marginal physical product declines. See RETURNS TO THE VARIABLE FACTOR INPUT.

direct cost the sum of the DIRECT MATERIALS COST and DIRECT LABOUR COST of a product. Direct cost tends to vary proportionately with the level of output. See VARIABLE COST.

direct debit see COMMERCIAL BANK.

direct investment any expenditure on physical ASSETS such as plant, machinery and stocks. See INVESTMENT.

directive (bank) an instrument of MONETARY POLICY involving the control of bank lending as a means of regulating the MONEY SUPPLY. If, for example, the monetary authorities wish to lower the money supply, they can ‘direct’ the banks to reduce the total amount of loan finance made available to personal and corporate borrowers. A reduction in bank lending can be expected to lead to a multiple contraction of bank deposits and, hence, a fall in the money supply. See BANK DEPOSIT CREATION.

direct labour 1 that part of the labour force in a firm that is directly concerned with the manufacture of a good or the provision of a service. Contrast INDIRECT LABOUR.

2 workers employed directly by local or central government to perform tasks rather than contracting out such tasks to private-sector companies. For example, a local authority might employ its own permanent construction workers to repair council houses rather than putting such repair work out to local firms. See VARIABLE COST, PRIVATIZATION.

direct marketing see DIRECT SELLING.

direct materials raw materials that are incorporated in a product. Compare INDIRECT MATERIALS. See VARIABLE COST.

direct selling/marketing a method of selling and buying goods and services that enables a supplier to sell direct to the final customer without the need for traditional ‘middlemen’ – wholesalers and retailers. Direct selling can be undertaken through catalogues (see MAIL ORDER) or by ‘clip-out’ coupons in newspapers, but increasingly it is being undertaken by telephone sales (e.g. telephone banking and insurance) and through e-commerce (INTERNET sales). Direct selling can provide firms with an effective means of tapping into a mass market; it can reduce BARRIERS TO ENTRY so that some small firms can offer their products alongside big-name companies; and by eliminating the ‘middleman’, selling costs and prices can be lowered, conferring COMPETITIVE ADVANTAGE. Apart from lower prices, another attraction for customers is the convenience of being able to ‘shop’ from home rather than having to visit a retail outlet.

direct tax a TAX levied by the government on the income and wealth received by individuals (households) and businesses in order to raise revenue and as an instrument of FISCAL POLICY. Examples of a direct tax are INCOME TAX, NATIONAL INSURANCE CONTRIBUTIONS, CORPORATION TAX and WEALTH TAX.

Direct taxes are incurred on income received, unlike indirect taxes, such as value-added taxes, that are incurred when income is spent. Direct taxes are progressive, insofar as the amount paid varies according to the income and wealth of the taxpayer. By contrast, INDIRECT TAX is regressive, insofar as the same amount is paid by each tax-paying consumer regardless of his or her income. See TAXATION, PROGRESSIVE TAXATION, REGRESSIVE TAXATION.

dirty float the manipulation by the monetary authorities of a country’s EXCHANGE RATE under a FLOATING EXCHANGE-RATE SYSTEM, primarily in order to gain a competitive advantage over trade partners. Thus, the authorities could intervene in the FOREIGN EXCHANGE MARKET to stop the exchange rate from otherwise appreciating (see APPRECIATION 1) in the face of market forces or, alternatively, they could deliberately engineer a DEPRECIATION of the exchange rate. See BEGGAR-MY-NEIGHBOUR POLICY.

discount 1 a deduction from the published LIST PRICE of a good or service allowed by a supplier to a customer. The discount could be offered for prompt payment in cash (cash discount) or for bulk purchases (trade discount). Trade discounts may be given to enable suppliers to achieve large sales volumes, and thus ECONOMICS OF SCALE, or may be used as a competitive stratagem to secure customer loyalty, or may be given under duress to large, powerful buyers. See AGGREGATED REBATE, BULK BUYING.

2 the sale of new STOCKS and SHARES at a reduced price. In the UK, this involves the issue of a new share at a price below its nominal value. In other countries where shares have no nominal value it involves the sale of new shares below their current market price.

3 the purchase of a particular company’s issued stock or share at a price below the average market price of those of other companies operating in the same field. The price is lower because investors feel less optimistic about that company’s prospects.

4 a fall in the prices of all stocks and shares in anticipation of a downturn in the economy.

5 the purchase of a BILL OF EXCHANGE, TREASURY BILL or BOND for less than its nominal value. Bills and bonds are redeemable at a specific future date at their face value. The original purchaser will buy the bill or bond for less than its nominal or face value (at a discount). The discount between the price that he pays and the nominal value of the bill or bond represents interest received on the loan made against the security of the bill or bond. If the owner of the bill or bond then wishes to sell it prior to maturity (rediscount it), then he will have to accept less than its nominal value (although more than he paid for it). The difference between the original price that he paid and the price received will depend largely upon the length of time before maturity. For example, if a bond with a nominal value of £1,000 redeemable in one year’s time were bought for £900, then the £100 discount on redemption value represents an interest rate of £1,000/900 = 11.1% on the loan.

6 the extent to which a foreign currency’s market EXCHANGE RATE falls below its ‘official’ exchange rate under a FIXED EXCHANGE RATE SYSTEM.