Dr. Pass - Economics

Exit barriers can limit the incentives for a firm to leave a market even when the returns from producing are less than the potential earnings from the company’s assets in their next best alternative use. Exit barriers arise when a firm has contractual obligations that it must meet whether or not it ceases production: for example, long-term contracts to purchase raw materials and components; or large redundancy pay obligations; or the presence of specific assets (see ASSET SPECIFICITY). See PRODUCT LIFE CYCLE, PRICE SYSTEM, CONTESTABLE MARKET.

barriers to imitationsee MOBILITY BARRIERS.

barterthe EXCHANGE of one economic good or service for another. Barter as an exchange mechanism, however, suffers from a number of serious disadvantages:

(a) for barter to take place, there must be a ‘coincidence of wants’, that is, each party to the barter must be able to offer something that the other wants. For example, an apple-grower wishing to obtain oranges must not only find an orange-grower but must particularly find an orange-grower wishing to acquire apples. Finding appropriate exchange partners can involve lengthy search activity, which reduces the time available for actually producing goods;

(b) even if the parties meet up, they then have to agree on an appropriate ‘rate of exchange’, for example, how many apples are to be exchanged for one orange? Haggling over exchange terms is again time-consuming, and where agreement cannot be reached between the two parties each will then have to seek out new exchange partners.

Overall, barter is a very inefficient means of organizing transactions in an economy and has been largely superseded by the PRICE SYSTEM in modern economies, using money as a medium of exchange. See COUNTERTRADE, BLACK ECONOMY.

base ratethe INTEREST RATE that is used by the COMMERCIAL BANKS to calculate rates of interest to be charged on bank loans and overdrafts to their customers. For example, a large company might be charged, say, an interest rate of base rate plus 2% on a loan, whereas a smaller borrower might be charged, say, base rate plus 4%. Formerly, base rates were linked directly to BANK RATE but are now fixed by reference to the ‘official’ rate of interest set by the MONETARY POLICY COMMITTEE of the Bank of England. See PRIME RATE.

base yearthe initial period from which a system of INDEXATION proceeds. For example, the present UK Consumer Price Index has as the base period 1996 = 100, with the average price of a typical basket of goods in 1996 being taken as the basis for the index. The 2004 index number was 111 for all items in the basket of goods. Convention dictates that the base period always commences from the number 100. See PRICE INDEX.

basing point price systema form of pricing products, such as cement, that are bulky and expensive to transport, which involves charging different prices to customers based in different locations. Customers located near to the supply source (or ‘base point’) are charged a lower delivery price compared to customers farther afield. See PRICE DISCRIMINATION, DELIVERED PRICE.

batch productionthe manufacture of a product in small quantities using labour-intensive methods of production (see LABOUR-INTENSIVE FIRM/INDUSTRY). Batch production is typically employed in industries where the product supplied is nonstandardized, with consumers demanding a wide variety of product-choice. Batch production industries are usually characterized by low levels of SELLER CONCENTRATION, easy entry conditions and high unit costs of supply. See PRODUCTION, MASS PRODUCTION, CONDITION OF ENTRY, FLEXIBLE MANUFACTURING SYSTEM.

beara person who expects future prices in a STOCK EXCHANGE or COMMODITY MARKET to fall and who seeks to make money by selling shares or commodities. Compare BULL. See SPOT MARKET, FUTURES MARKET, BEAR MARKET.

bearer bondsFINANCIAL SECURITIES that are not registered under the name of a particular holder but where possession serves as proof of ownership. Such securities are popular in the American financial system but fairly rare in Britain, where the names of holders of STOCKS and SHARES are recorded in a company’s share register.

bear marketa situation where the prices of FINANCIAL SECURITIES (stocks, shares, etc.) or COMMODITIES (tin, wheat, etc.) are tending to fall as a result of persistent selling and only limited buying. See SPECULATOR. Compare BULL MARKET.

beggar-my-neighbour policya course of action that is entered into by a country unilaterally in pursuit of its own self interest in INTERNATIONAL TRADE even though this might adversely affect the position of other countries. For example, country A might decide to impose TARIFFS or EXCHANGE CONTROLS on imports from other countries in order to protect certain domestic industries. The great danger with this type of policy, however, is that it can be self-defeating; that is, other countries may retaliate by imposing tariffs, etc., of their own on country A’s exports, with the result that everybody’s exports suffer. To avoid confrontation of this kind, various international organizations have been established to regulate the conduct of international trade and monetary dealings. See WORLD TRADE ORGANIZATION, INTERNATIONAL MONETARY FUND, EXPORT INCENTIVES, IMPORT RESTRICTIONS, DIRTY FLOAT, DUMPING.

behavioural theory of the firman alternative to the traditional, profit-maximizing THEORY OF THE FIRM, which stresses the nature of large companies as complex organizations beset by problems of goal conflict and communications. The behavioural theory examines the inherent conflict between the goals of individuals and subgroups within the organization and suggests that organizational objectives grow out of the interaction among these individuals and subgroups.

Cyert and March, who helped develop the behavioural theory, suggested five major goals that are relevant to companies’ sales, output and pricing strategies:

(a) production goal;

(b) inventory goal;

(c) sales goal;

(d) market-share goal;

(e) profit goal.

Each of these goals will be the primary concern of certain managers in the organization, and these managers will press their particular goals. The goals become the subject of ‘bargaining’ among managers, and such overall goals as do emerge will be compromises, often stated as satisfactory-level targets (see SATISFACTORY THEORY). This intergroup conflict, however, rarely threatens the organization’s survival because ORGANIZATIONAL SLACK provides a pool of emergency resources that permit managers to meet their goals when the economic environment becomes hostile.

In order to achieve rational decision-making, it would be necessary to eradicate inconsistencies between goals and resolve conflicts between objectives. Traditional economic theory suggests that rationality can be achieved, painting a picture of ‘ECONOMIC MAN’, able to specify his objectives and take actions consistent with their achievement. By contrast, the behavioural theory argues that goals are imperfectly rationalized so that new goals are not always consistent with existing policies; and that goals are stated in the form of aspiration-level targets rather than maximizing goals, targets being raised or lowered in the light of experience. Consequently, not all objectives will receive attention at the same time and objectives will change with experience.

The behavioural theory also focuses attention on internal communications problems in large organizations, pointing out that decision-making is distributed throughout the firm rather than concentrated at the apex of the organization pyramid. This happens because lower-level managers do not just execute the orders of those at the top; they exercise initiative: