Dr. Pass - Economics

aidsee ECONOMIC AID.

allocative efficiencyan aspect of MARKET PERFORMANCE that denotes the optimum allocation of scarce resources between end users in order to produce that combination of goods and services that best accords with the pattern of consumer demand. This is achieved when all market prices and profit levels are consistent with the real resource costs of supplying products. Specifically, consumer welfare is optimized when for each product the price is equal to the lowest real resource cost of supplying that product, including a NORMAL PROFIT reward to suppliers. Fig. 7 (a) depicts a normal profit equilibrium under conditions of PERFECT COMPETITION with price being determined by the intersection of the market supply and demand curves and with MARKET ENTRY/MARKET EXIT serving to ensure that price (P) is equal to minimum supply cost in the long run (AC).

Fig. 7 Allocative efficiency.(a) A normal profit equilibrium under conditions of perfect competition. (b) The profit maximizing price-output combination for a monopolist.

By contrast, where some markets are characterized by monopoly elements, then in these markets output will tend to be restricted so that fewer resources are devoted to producing these products than the pattern of consumer demand warrants. In these markets, prices and profit levels are not consistent with the real resource costs of supplying the products. Specifically, in MONOPOLY markets the consumer is exploited by having to pay a price for a product that exceeds the real resource cost of supplying it, this excess showing up as an ABOVE-NORMAL PROFIT for the monopolist.

Fig. 7 (b) depicts the profit maximizing price-output combination for a monopolist, determined by equating marginal cost and marginal revenue. This involves a smaller output and a higher price than would be the case under perfect competition, with BARRIERS TO ENTRY serving to ensure that the output restriction and excess prices persist over the long run. See PARETO OPTIMALITY, MARKET FAILURE.

Alternative Investment Marketsee UNLISTED-SECURITIES MARKET.

amalgamationsee MERGER.

Amsterdam Treaty, 1997a EUROPEAN UNION (EU) statute that extended various provisions of the MAASTRICHT TREATY in the areas of social policy (particularly discriminations against persons and the integration of the SOCIAL CHAPTER), internal procedures for the administration of EU institutions and the EU’s Common Foreign and Security Policy (including defence).

Andean Pacta regional alliance originally formed in 1969 with the general objective of establishing a COMMON MARKET. The current members of the Andean Pact are Peru, Chile, Ecuador, Columbia and Bolivia. By the mid 1980s, however, it had all but collapsed because of various economic and political instabilities. The Pact was relaunched in 1990 minus Chile but with a new member, Venezuela, renewing its commitment to the eventual introduction of a common market. See TRADE INTEGRATION.

annual general meeting (AGM)the yearly meeting of SHAREHOLDERS that JOINT-STOCK COMPANIES are required by law to convene, in order to allow shareholders to discuss their company’s ANNUAL REPORT AND ACCOUNTS, elect members of the BOARD OF DIRECTORS and agree the DIVIDEND payouts suggested by directors. In practice, annual general meetings are usually poorly attended by shareholders and only rarely do directors fail to be re-elected on the strength of PROXY votes cast in favour of the directors. See CORPORATE GOVERNANCE.

annual report and accountsa yearly report by the directors of a JOINT-STOCK COMPANY to the SHAREHOLDERS. It includes a copy of the company’s BALANCE SHEET and a summary PROFIT-AND-LOSS ACCOUNT, along with other information that directors are required by law to disclose to shareholders. A copy of the annual report and accounts is sent to every shareholder prior to the company’s ANNUAL GENERAL MEETING.

annuitya series of equal payments at fixed intervals from an original lump sum INVESTMENT. Where an annuity has a fixed time span, it is termed an annuity certain , and the periodic receipts comprise both a phased repayment of principal (the original lump sum payment) and interest, such that at the end of the fixed term there is a zero balance on the account. An annuity in perpetuity does not have a fixed time span but continues indefinitely and receipts can therefore come only from interest earned. Annuities can be obtained from pension funds or life insurance schemes.

anticipated inflationthe future INFLATION rate in a country that is generally expected by business people, trade union officials and consumers. People’s anticipations about the inflation rate will influence their price-setting, wage bargaining and spending/saving decisions. As part of its policy to reduce inflation, governments seek to influence anticipations by ‘talking down’ prospects of inflation, publishing norm percentages for prices and incomes, etc. Compare UNANTICIPATED INFLATION. See EXPECTATIONS, EXPECTATIONS-ADJUSTED/AUGMENTED PHILLIPS CURVE.

anti-competitive agreementa form of COLLUSION between suppliers aimed at restricting or removing competition between them. For the most part, such agreements concentrate on fixing common selling prices and discounts but may also contain provisions relating to market-sharing, production quotas and coordinated capacity adjustments. The main objection to such agreements is that they raise prices above competitive levels, impose unfair terms and conditions on buyers and serve to protect inefficient suppliers from the rigours of competition. In the UK, anti-competitive agreements are prohibited by the COMPETITION ACT 1998. See also RESTRICTIVE PRACTICES COURT.

anti-competitive practicea commercial practice operated by a firm that has the effect of restricting, distorting or eliminating competition (especially if operated by a dominant firm) to the detriment of other suppliers and consumers. Examples of restrictive practices include EXCLUSIVE DEALING, REFUSAL TO SUPPLY, FULL LINE FORCING, TIE-IN SALES, AGGREGATED REBATES, RESALE PRICE MAINTENANCE and LOSS LEADING.

Under the COMPETITION ACT 1980, exclusive dealing, full line forcing, tie-in sales and 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. The RESALE PRICES ACTS 1964, 1976 make the practice of resale price maintenance illegal unless it is, very exceptionally, exempted by the Office of Fair Trading. See also PRICE SQUEEZE.

anti-dumping dutysee COUNTERVAILING DUTY.

antimonopoly policysee COMPETITION POLICY.

antitrust policysee COMPETITION POLICY.

APECsee ASIAN PACIFIC ECONOMIC COOPERATION.

application moneythe amount payable per share on application for a new SHARE ISSUE.

applied economicsthe application of economic analysis to real world economic situations. Applied economics seeks to employ the predictions emanating from ECONOMIC THEORY in offering advice on the formulation of ECONOMIC POLICY. See ECONOMIC MODELS, HYPOTHESIS, HYPOTHESIS TESTING.

appreciation1 an increase in the value of a CURRENCY against other currencies under a FLOATING EXCHANGE-RATE SYSTEM. An appreciation of a currency’s value makes IMPORTS (in the local currency) cheaper and EXPORTS (in the local currency) more expensive, thereby encouraging additional imports and curbing exports, so assisting in the removal of a BALANCE OF PAYMENTS surplus and the excessive accumulation of INTERNATIONAL RESERVES.