Dr. Pass - Economics

Fig. 3 Advertising.(a) The static market effects of advertising on demand (D). The profit maximizing (see PROFIT MAXIMIZATION) price-output combination (PQ) without advertising is shown by the intersection of the marginal revenue curve (MR) and the marginal cost curve (MC). By contrast, the addition of advertising costs serves to shift the marginal cost curve to MC 1, so that the PQ combination (shown by the intersection of MR and MC 1) now results in higher price (P A) and lower quantity supplied (Q A).

(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 AD Awith a new marginal revenue curve (MR A). 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 1) is lower than the original marginal cost curve. The new profit maximizing price-output combination (determined by the intersection at MR Aand MC 1results in a lower price (P A) than before and a larger quantity supplied (Q A). 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 agencya 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 servicethe 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 costa 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.

agenta 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 concentrationsee CONCENTRATION MEASURES.

aggregate demand or aggregate expenditurethe 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 determinationsee EQUILIBRIUM LEVEL OF NATIONAL INCOME.

aggregate demand schedulea 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).