Economics

, so that the PQ combination (shown by the intersection of MR and MC

) now results in higher price (P

) and lower quantity supplied (Q

).

(b) The initial profit-maximizing price-output combination (PQ) without advertising is shown by the intersection of the marginal revenue curve (MR) and the marginal cost curve (MC). The effect of advertising is to expand total market demand from DD to D

D

with a new marginal revenue curve (MR

). This expansion of market demand enables the industry to achieve economies of scale in production, which more than offsets the additional advertising cost. Hence, the marginal cost curve in the expended market (MC

) is lower than the original marginal cost curve. The new profit maximizing price-output combination (determined by the intersection at MR

and MC

results in a lower price (P

) than before and a larger quantity supplied (Q

). See BARRIERS TO ENTRY, MONOPOLISTIC COMPETITION, OLIGOPOLY, DISTRIBUTIVE EFFICIENCY.

There are two contrasting views of advertising’s effect on MARKET PERFORMANCE. Traditional ‘static’ market theory, on the one hand, emphasizes the misallocative effects of advertising. Here advertising is depicted as being solely concerned with brand-switching between competitors within a static overall market demand and serves to increase total supply costs and the price paid by the consumer. This is depicted in Fig. 3 (a). (See PROFIT MAXIMIZATION).

The alternative view of advertising emphasizes its role as one of expanding market demand and ensuring that firms’ demand is maintained at levels that enable them to achieve economies of large-scale production (see ECONOMIES OF SCALE). Thus, advertising may be associated with a higher market output and lower prices than allowed for in the static model. This is illustrated in Fig. 3 (b).

advertising agency a business that specializes in providing marketing services for firms. Agencies usually devise, programme and manage specific advertising campaigns on behalf of clients. See ADVERTISEMENT, ADVERTISING.

Advertising Standards Authority (ASA) a body that regulates the UK ADVERTISING industry to ensure that ADVERTISEMENTS provide a fair, honest and unambiguous representation of the products they promote.

Advisory, Conciliation and Arbitration Service (ACAS) a body established in the UK in 1975 to provide counselling services with regard to INDUSTRIAL RELATIONS and employment policy matters, in particular that of MEDIATION, CONCILIATION and ARBITRATION in cases of INDUSTRIAL DISPUTE.

after-sales service the provision of back-up facilities by a supplier or his agent to a customer after he has purchased the product. After-sales service includes the replacement of faulty products or parts and the repair and maintenance of the product on a regular basis. These services are often provided free of charge for a limited period of time through formal guarantees of product quality and performance, and thereafter, for a modest fee, as a means of securing continuing customer goodwill. After-sales service is thus an important part of competitive strategy. See PRODUCT DIFFERENTIATION.

agency cost a form of failure in the contractual relationship between a PRINCIPAL (the owner of a firm or other assets) and an AGENT (the person contacted by the principal to manage the firm or other assets). This failure arises because the principal cannot fully monitor the activities of the agent. Thus there is a possibility that an agent may not act in the interests of his principal, unless the principal can design an appropriate reward structure for the agent that aligns the agent’s interests with those of the principal.

Agency relations can exist between firms, for example, licensing and franchising arrangements between the owner of a branded product (the principal) and licensees who wish to make and sell that product (agents). However, agency relations can also exist within firms, particularly in the relationship between the shareholders who own a public JOINT-STOCK COMPANY (the principals) and salaried professional managers who run the company (the agents). Agency costs can arise from slack effort by employees and the cost of monitoring and supervision designed to deter slack effort. See PRINCIPAL-AGENT THEORY, CONTRACT, TRANSACTION, DIVORCE OF OWNERSHIP FROM CONTROL, MANAGERIAL THEORIES OF THE FIRM, TEAM PRODUCTION.

agent a person or company employed by another person or company (called the principal) for the purpose of arranging CONTRACTS between the principal and third parties. An agent thus acts as an intermediary in bringing together buyers and sellers of a good or service, receiving a flat or sliding-scale commission, brokerage or fee related to the nature and comprehensiveness of the work undertaken and/or value of the transaction involved. Agents and agencies are encountered in one way or another in most economic activities and play an important role in the smooth functioning of the market mechanism. See PRINCIPAL-AGENT THEORY for discussion of ownership and control issues as they affect the running of companies. See ESTATE AGENT, INSURANCE BROKER, STOCKBROKER, DIVORCE OF OWNERSHIP FROM CONTROL.

aggregate concentration see CONCENTRATION MEASURES.

aggregate demandoraggregate expenditure the total amount of expenditure (in nominal terms) on domestic goods and services. In the CIRCULAR FLOW OF NATIONAL INCOME MODEL aggregate demand is made up of CONSUMPTION EXPENDITURE (C), INVESTMENT EXPENDITURE (I), GOVERNMENT EXPENDITURE (G) and net EXPORTS (exports less imports) (E):

aggregate demand = C + I + G + E

Some of the components of aggregate demand are relatively stable and change only slowly over time (e.g. consumption expenditure); others are much more volatile and change rapidly, causing fluctuations in the level of economic activity (e.g. investment expenditure).

In 2003, consumption expenditure accounted for 52%, investment expenditure accounted for 13%, government expenditure accounted for 15% and exports accounted for 20% of gross final expenditure (GFE) on domestically produced output. (GFE minus imports = GROSS DOMESTIC PRODUCT). See Fig. 133 (a) NATIONAL INCOME ACCOUNTS.

Aggregate demand interacts with AGGREGATE SUPPLY to determine the EQUILIBRIUM LEVEL OF NATIONAL INCOME. Governments seek to regulate the level of aggregate demand in order to maintain FULL EMPLOYMENT, avoid INFLATION, promote ECONOMIC GROWTH and secure BALANCE-OF-PAYMENTS EQUILIBRIUM through the use of FISCAL POLICY and MONETARY POLICY. See AGGREGATE DEMAND SCHEDULE, ACTUAL GROSS NATIONAL PRODUCTS DEFLATIONARY GAP, INFLATIONARY GAP, BUSINESS CYCLE, STABILIZATION POLICY, POTENTIAL GROSS NATIONAL PRODUCT.

aggregate demand/aggregate supply approach to national income determination see EQUILIBRIUM LEVEL OF NATIONAL INCOME.

aggregate demand schedule a schedule depicting the total amount of spending on domestic goods and services at various levels of NATIONAL INCOME. It is constructed by adding together the CONSUMPTION, INVESTMENT, GOVERNMENT EXPENDITURE and EXPORTS schedules, as indicated in Fig. 4 (a).

A given aggregate demand schedule is drawn up on the usual CETERIS PARIBUS conditions. It will shift upwards or downwards if some determining factor changes. See Fig. 4 (b).

Alternatively, the aggregate demand schedule can be expressed in terms of various levels of real national income demanded at each PRICE LEVEL as shown in Fig. 4 (c). This alternative schedule is also drawn on the assumption that other influences on spending plans are constant. It will shift rightwards or leftwards if some determining factors change. See Fig. 4 (d). This version of the aggregate demand schedule parallels at the macro level the demand schedule and DEMAND CURVE for an individual product, although in this case the schedule represents demand for all goods and services and deals with the general price level rather than with a particular price.

Fig. 4 Aggregate demand schedule. (a) The graph shows how AGGREGATE DEMAND varies with the level of NATIONAL INCOME. b) Shifts in the schedule because of determining factor changes. For example, if there is an increase in the PROPENSITY TO CONSUME, the consumption schedule will shift upwards, serving to shift the aggregate demand schedule upwards from AD to AD

; a reduction in government spending will shift the schedule downwards from AD to AD

. (c)The graph plots the quantity of real national income demanded against the price level. (d) Shifts in the schedule because of determining factor changes. For example, if there is an increase in the propensity to consume, the aggregate demand schedule will shift rightwards from AD to AD

; a reduction in government spending will shift the schedule leftwards from AD to AD

.

aggregated rebate a trade practice whereby DISCOUNTS on purchases are related not to customers’ individual orders but to their total purchases over a period of time. Aggregated rebate is used to foster buyer loyalty to the supplier, but it can produce anti-competitive effects because it encourages buyers to place the whole of their orders with one supplier, to the exclusion of competing suppliers. Under the Competition Act 1980, aggregated rebates can be investigated by the Office of Fair Trading and (if necessary) the COMPETITION COMMISSION and prohibited if found to unduly restrict competition.

aggregate expenditure see AGGREGATE DEMAND.

aggregate supply the total amount of domestic goods and services supplied by businesses and government, including both consumer products and capital goods. Aggregate supply interacts with AGGREGATE DEMAND to determine the EQUILIBRIUM LEVEL OF NATIONAL INCOME (see AGGREGATE SUPPLY SCHEDULE).

In the short term, aggregate supply will tend to vary with the level of demand for goods and services, although the two need not correspond exactly. For example, businesses could supply more products than are demanded in the short term, the difference showing up as a build-up of unsold STOCKS (unintended INVENTORY INVESTMENT). On the other hand, businesses could supply fewer products than are demanded in the short term, the difference being met by running down stocks. However, discrepancies between aggregate supply and aggregate demand cannot be very large or persist for long, and generally businesses will offer to supply output only if they expect spending to be sufficient to sell all that output.

Over the long term, aggregate supply can increase as a result of increases in the LABOUR FORCE, increases in CAPITAL STOCK and improvements in labour PRODUCTIVITY. See ACTUAL GROSS NATIONAL PRODUCT, POTENTIAL GROSS NATIONAL PRODUCT, ECONOMIC GROWTH.

aggregate supply schedule a schedule depicting the total amount of domestic goods and services supplied by businesses and government at various levels of total expenditure. The AGGREGATE SUPPLY schedule is generally drawn as a 45° line because business will offer any particular level of national output only if they expect total spending (AGGREGATE DEMAND) to be just sufficient to sell all of that output. Thus, in Fig. 5 (a), £100 million of expenditure calls forth £100 million of aggregate supply, £200 million of expenditure calls forth £200 million of aggregate supply, and so on. This process cannot continue indefinitely, however, for once an economy’s resources are fully employed in supplying products then additional expenditure cannot be met from additional domestic resources because the potential output ceiling of the economy has been reached. Consequently, beyond the full-employment level of national product, Y

, the aggregate supply schedule becomes vertical. See POTENTIAL GROSS NATIONAL PRODUCT, ACTUAL GROSS NATIONAL PRODUCT.

Alternatively, the aggregate supply schedule can be expressed in terms of various levels of real national income supplied at each PRICE LEVEL as shown in Fig. 5 (b). This version of the aggregate supply schedule parallels at the macro level the supply schedule and SUPPLY CURVE for an individual product, though in this case the schedule represents the supply of all goods and services and deals with the general price level rather than a particular product price. Fig. 5 (c) shows a shift of the aggregate supply curve to the right as a result of, for example, increases in the labour force or capital stock and technological advances.

Aggregate supply interacts with aggregate demand to determine the EQUILIBRIUM LEVEL OF NATIONAL INCOME.

Fig. 5 Aggregate supply schedule. See entry.

AGM see ANNUAL GENERAL MEETING.

agricultural policy a policy concerned both with protecting the economic interests of the agricultural community by subsidizing farm prices and incomes, and with promoting greater efficiency by encouraging farm consolidation and mechanization.

Fig. 6 Agricultural policy. (a) The short-term shifts in supply (S) and their effects on price (P) and quantity (Q). (b) Long-term shifts caused by the influence of productivity improvement on supply.