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By contrast, the OPEN ECONOMY allows for the influence of imports and exports and here aggregate demand is represented in the circular flow as:
closed shop a requirement that all employees in a given workplace or ORGANIZATION be members of a specified TRADE UNION. Closed shops are often imposed by powerful trade unions as a means of restricting the supply of labour and maintaining high wage rates for members. See SUPPLY-SIDE ECONOMICS.
club principle a means of allocating the common overhead costs incurred in providing a good or service to each individual consumer. For example, residents may create a club to arrange for the resurfacing of a private road. See COLLECTIVE PRODUCTS, FREE-RIDER.
clusters geographically proximate groups of interconnected companies, suppliers, service producers and associated institutions, linked by commodities and complementarities. Michael Porter identified clusters as being vital for competitiveness insofar as they improve productivity and flexibility, aid innovation and contribute to new business formation. Porter noted that national economics tend to specialise in certain industrial clusters and that if these clusters are internationally competitive then their export performance will be good. See COMPETITIVE ADVANTAGE OF COUNTRIES, EXTERNAL ECONOMIES OF SCALE.
Coase theorem see TRANSACTION COSTS.
Cobb-Douglas production function a particular physical relationship between OUTPUT of products and FACTOR INPUTS (LABOUR and CAPITAL) used to produce these outputs. This particular form of the PRODUCTION FUNCTION suggests that where there is effective competition in factor markets the ELASTICITY OF TECHNICAL SUBSTITUTION between labour and capital will be equal to one; that is, labour can be substituted for capital in any given proportions, and vice-versa, without affecting output.
The Cobb-Douglas production function suggests that the share of labour input and the share of capital input are relative constants in an economy, so that although labour and capital inputs may change in absolute terms, the relative share between the two inputs remains constant. See PRODUCTION POSSIBILITY BOUNDARY, CAPITAL-LABOUR RATIO, PRODUCTION FUNCTION, CAPITAL-INTENSIVE FIRM/INDUSTRY, ISOQUANT CURVE, ISOQUANT MAP.
cobweb theorem a theory designed to explain the path followed in moving toward an equilibrium situation when there are lags in the adjustment of either SUPPLY or DEMAND to changes in prices, COMPARATIVE STATIC EQUILIBRIUM ANALYSIS predicts the effect of demand or supply changes by comparing the original equilibrium price and quantity with the new equilibrium that results. The cobweb theorem focuses upon the dynamic process of adjustment in markets by tracing the path of adjustment of prices and output in moving from one equilibrium situation toward another (see DYNAMIC ANALYSIS).
Fig. 23 Cobweb theorem. See entry.
The cobweb theorem is generally used to describe oscillations in prices in agricultural markets where the delay between, for example, planting and harvesting means that supply reacts to prices with a time lag. The simplest case where current quantity demanded responds to current price while current quantity supplied depends upon price in the previous period is depicted in Fig. 23. In the figure, D
denotes quantity demanded in the current period, S
, denotes quantity supplied, while price is denoted by P
, and price in the previous period is denoted by P
. If demand were to fall rapidly, such that the demand curve shifted left from D
to D
, then comparative static analysis suggests that the market will eventually move from equilibrium point E (with price OP
and quantity OQ
) to equilibrium point E
(with price OP
and quantity OQ
). Dynamic analysis suggest that the path followed will be less direct than this.
Starting from the original equilibrium price OP
, which has prevailed in years t–1 and t, farmers will have planned to produce quantity OQ
. However, after the contraction in demand in year t, supply will exceed demand by QQ
, and in order to sell all the quantity OQ
coming on to the market, price has to fall to OP
. The lower price OP
, which prevails in year t, will discourage farmers from producing and they will reduce acreage devoted to this crop so that in the next year t + 1 a much smaller quantity OQ
is supplied.
In year t + 1, and at price OP
, demand now exceeds supply by the amount Q
Q
, and in order to ration the limited supply OQ
that is available, price will rise to OP
. This higher price in year t + 1 will encourage farmers to increase their acreage planted so that in the following year t + 2, a larger quantity OQ
will be supplied, which means that in year t + 2 supply exceeds demand and price will fall below OP
, which will discourage planting for the following year, and so on. The eventual result of this process of adjustment is that a new equilibrium is achieved at E
but only after a series of fluctuating prices in intermediate periods are experienced. See AGRICULTURAL POLICY.
coin the metallic CURRENCY that forms part of a country’s MONEY SUPPLY. Various metals have been used for coinage purposes. Formerly, gold and silver were commonly used but these have now been replaced in most countries by copper, brass and nickel. Coins in the main constitute the ‘low value’ part of the money supply. See MINT, LEGAL TENDER.
collateral security the ASSETS pledged by a BORROWER as security for a LOAN, for example, the title deeds of a house. In the event of the borrower defaulting on the loan, the LENDER can claim these assets in lieu of the sum owed. See DEBT, DEBTOR.
collective bargaining the negotiation of PAY, conditions of employment, etc., by representatives of the labour force (usually trade union officials) and management. Collective bargaining agreements are negotiated at a number of different levels, ranging from local union branches and a single factory to general unions and an entire industry.
Increasingly, plant- and company-level collective bargaining has dealt with PRODUCTIVITY as well as wages and conditions, with trade unions and the workforce offering to relax RESTRICTIVE LABOUR PRACTICES in return for improved wages and conditions. Such relaxations allow the firm to utilize labour more efficiently and flexibly, helping to improve the competitiveness of the firm.
Industry-wide bargaining can have inflationary consequences when trade unions use comparability arguments for wage increases with high percentage wage increases in industries that have experienced large productivity gains being extended on comparability grounds to other industries where the increases are not entirely justified on efficiency grounds. The selective use of comparability arguments for wage increases and pressures to maintain traditional WAGE DIFFERENTIALS can lead to COST-PUSH INFLATION. See TRADE UNION, INDUSTRIAL RELATIONS, INDUSTRIAL DISPUTE.
collective products any goods or services that cannot be provided other than on a group basis because the quantity supplied to any one individual cannot be independently varied. Such products are non-excludable since it is difficult or impossible to exclude any individual from enjoying their benefits, for example, television airwave transmissions. Such products are also non-rival, insofar as one person’s consumption of the product does not affect the consumption opportunities of anyone else. It is virtually impossible to get consumers to reveal their preferences regarding collective goods because rational consumers will attempt to become FREE-RIDERS, each understating his demand in the hope of avoiding his share of the cost without affecting the quantity he obtains. Consequently, such products cannot be marketed in the conventional way and we cannot use market prices to value them. Many goods and services supplied by government are of a collective nature, for example, national defence and police protection, and here government decides on the amounts of such products to provide and compels individuals to pay for them through taxation. See MARKET FAILURE, CLUB PRINCIPLE, SOCIAL PRODUCTS.
collectivism see CENTRALLY PLANNED ECONOMY.
collusion a form of INTERFIRM CONDUCT pattern in which firms arrive at an agreement or ‘understanding’ covering their market actions. Successful collusion requires the acceptance of a common objective for all firms (for example, JOINT-PROFIT MAXIMIZATION) and the suppression of behaviour inconsistent with the achievement of this goal (for example, price competition). Collusion may be either overt or tacit. Overt collusion usually takes the form of either an express agreement in writing or an express oral agreement arrived at through direct consultation between the firms concerned. Alternatively, collusion may take the form of an ‘unspoken understanding’ arrived at through firms’ repeated experiences with each other’s behaviour over time.
The purpose of collusion may be jointly to monopolize the supply of a product in order to extract MONOPOLY profits, or it may be a ‘defensive’ response to poor trading conditions, seeking to prevent prices from dropping to uneconomic levels. Because, however, of its generally adverse effects on market efficiency (cushioning inefficient, high-cost suppliers) and because it deprives buyers of the benefits of competition (particularly lower prices), collusion is either prohibited outright by COMPETITION POLICY or permitted to continue only in exceptional circumstances.
In the UK, under the COMPETITION ACT 1998, collusion in the form of an ANTI-COMPETITIVE AGREEMENT/RESTRICTIVE TRADE AGREEMENT is prohibited outright. Previously, under the RESTRICTIVE TRADE PRACTICES ACT, such agreements were allowed to continue, providing ‘net economic benefit’ could be established. See CARTEL, RESTRICTIVE TRADE AGREEMENT, ANTICOMPETITIVE AGREEMENT, OLIGOPOLY, DUOPOLY, INFORMATION AGREEMENT, RESTRICTIVE PRACTICES COURT.
collusive duopoly see DUOPOLY.
command economy see CENTRALLY PLANNED ECONOMY.
commercial bankorclearing bank a BANK that accepts deposits of money from customers and provides them with a payments transmission service (CHEQUES), together with saving and loan facilities.
Commercial banking in the UK is conducted on the basis of an interlocking ‘branch’ network system that caters for local and regional needs as well as allowing the major banks, such as Barclays and NatWest, to cover the national market. Increasingly, the leading banks have globalized their operations to provide traditional banking services to international companies as well as diversifying into a range of related financial services such as the provision of MORTGAGES, INSURANCE and UNIT TRUST investment and SHARE PURCHASE/SALE.
Bank deposits are of two types:
(a) sight deposits, or current account deposits, which are withdrawable on demand and which are used by depositors to finance day-to-day personal and business transactions as well as to pay regular commitments such as instalment credit repayments. Most banks now pay interest on outstanding current account balances;
(b) time deposits, or deposit accounts, which are usually withdrawable subject to some notice being given to the bank and which are held as a form of personal and corporate saving and to finance irregular, ‘one-off’ payments. Interest is payable on deposit accounts, normally at rates above those paid on current accounts, in order to encourage clients to deposit money for longer periods of time, thereby providing the bank with a more stable financial base.
Customers requiring to draw on their bank deposits may do so in a number of ways: direct cash withdrawals are still popular and have been augmented by the use of cheque/cash cards for greater convenience (i.e. cheque/cash cards can be used to draw cash from a dispensing machine outside normal business hours). However, the greater proportion of banking transactions is undertaken by cheque and CREDIT CARD payments and by such facilities as standing orders and direct debits. Payment by cheque is the commonest form of non-cash payment involving the drawer detailing the person or business to receive payment and authorizing his bank to make payment by signing the cheque, with the recipient then depositing the cheque with his own bank. Cheques are ‘cleared’ through an inter-bank CLEARING HOUSE SYSTEM, with customers’ accounts being debited and credited as appropriate (see also BACS). Credit cards enable a client of the bank to make a number of individual purchases of goods and services on CREDIT over a particular period of time, which are then settled by a single debit to the person’s current account or, alternatively, paid off on a loan basis (see below).
Under a standing order arrangement, a depositor instructs his bank to pay from his account a regular fixed sum of money into the account of a person or firm he is indebted to, again involving the respective debiting and crediting of the two accounts concerned. In the case of a direct debit, the customer authorizes the person or firm to whom he is indebted to arrange with his bank for the required regular payment to be transferred from his account.
Commercial banks make loans to personal borrowers to finance the purchase of a variety of products, while they are a major source of WORKING CAPITAL finance for businesses covering the purchase of short-term assets such as materials and components and the financing of work-in-progress and the stockholding of final products. Loans may be for a specified amount and may be made available for fixed periods of time at agreed rates of interest, or may take the form of an overdraft facility, where the person or firm can borrow as much as is required up to a pre-arranged total amount and is charged interest on outstanding balances.
A commercial bank has the dual objective of being able to meet currency withdrawals on demand and of putting its funds to profitable use. This influences the pattern of its asset holdings; a proportion of its funds are held in a highly liquid form (the RESERVE ASSET RATIO), including TILL MONEY, BALANCES WITH THE BANK OF ENGLAND, CALL MONEY with the DISCOUNT MARKET, BILLS OF EXCHANGE and TREASURY BILLS. These liquid assets enable the bank to meet any immediate cash requirements that its customers might make, thereby preserving public confidence in the bank as a safe repository for deposits. The remainder of the bank’s funds are used to earn profits from portfolio investments in public sector securities and fixed-interest corporate securities, together with loans and overdrafts.
In recent times, the commercial banks have been markedly affected by changes introduced by the FINANCIAL SERVICES ACT 1986, which has allowed other financial institutions to set themselves up as ‘financial supermarkets’, offering customers a banking service and a wide range of personal financial products, including insurance, mortgages, personal pensions, unit trusts and individual savings accounts (ISAs), etc. This development has introduced a powerful new competitive impetus into the financial services industry, breaking down traditional ‘demarcation’ boundaries in respect of ‘who does what’, allowing banks to ‘cross-sell’ these services and products in competition with traditional providers such as the BUILDING SOCIETIES, INSURANCE COMPANIES, UNIT TRUSTS, etc.
This and other developments (in particular, the globalization of investment banking) have in turn caused a number of structural changes. Intra- and inter-takeovers-mergers have occurred (e.g. the Lloyds-TSB Banks’ tie-up and their takeover of the Cheltenham and Gloucester building society); foreign banks have increasingly moved into the UK through either takeover (e.g. Hong Kong and Shanghai Banking Corp’s takeover of the Midland Bank and Deutsche Bank’s acquisition of the Morgan Grenfell investment house) or by setting up local offices; building societies such as the Abbey National, Woolwich and Halifax have converted themselves into banks. Direct banking services (via the telephone and the internet) have increasingly taken market share away from traditional branch networks. This has led to pressure on banks to cut costs by reducing the number of their branches. Another notable development has been the rapid rise in ATMs (AUTOMATIC TELLER MACHINES, referred to popularly as ‘hole in the wall’ machines).
The commercial banks play a unique role in a country’s monetary system through their capacity to engage in multiple BANK DEPOSIT CREATION by providing credit through loans and overdrafts. Bank deposits constitute by far the largest single component of the broad MONEY SUPPLY (especially M4) and as such are a crucial target for the application of MONETARY POLICY in controlling the economy. See MONEY SUPPLY DEFINITIONS, BANK OF ENGLAND. See also EFTPOS.
commission 1 payments to AGENTS for performing services on behalf of a seller or buyer. Commissions are usually based on the value of the product being sold or bought. Examples of commissions include salespersons’ commissions, estate agents’ fees and insurance brokers’ commissions. 2 a body that acts as an ‘official’ regulatory or administrative authority with respect to a specified activity. For example, the COMPETITION COMMISSION hears cases of monopolies, mergers and anti-competitive practices referred to it by the Office of Fair Trading under UK competition policy. The European Commission is the main body responsible for the day-to-day administration of the affairs of the EUROPEAN UNION.
commodity 1 see GOODS. 2 raw materials rather than goods in general: for example, tea, coffee, iron ore, aluminium, etc.
commodity broker a dealer in raw materials. See COMMODITY MARKET.
commodity market a market for the buying and selling of agricultural produce and minerals such as coffee and tin. Commodity business is conducted through various international commodity exchanges, some of the more prominent ones being based in London, for example the London Metal Exchange and the London International Financial Futures Exchange.
Commodity markets provide an organizational framework for the establishment of market prices and ‘clearing’ deals between buyers and sellers (see CLEARING HOUSE SYSTEM). Commodity dealers and brokers act as intermediaries between buyers and sellers wishing to conclude immediate spot transactions (see SPOT MARKET) or to buy or sell forward (see FUTURES MARKET).
commodity money products that can be used as a means of payment (see MONEY) but which are valuable in their own right, for example, cigarettes or alcoholic drinks. Commodity money is generally only used as a means of payment if confidence in money falls as a result of, say, rapid INFLATION.
Common Agricultural Policy (CAP) the policy of the EUROPEAN UNION (EU) for assisting the farm sector. The main aims of the CAP are fair living standards for farmers and an improvement in agricultural efficiency (see AGRICULTURAL POLICY).
The CAP is administered by the European Agricultural Guidance and Guarantee Fund, with major policy and operational decisions (e.g. the fixing of annual farm prices) residing in the hands of the Council of Ministers of the EU. The farm sector is assisted in four main ways:
(a) around 70–75% of EU farm produce benefits directly from the operation of a PRICE-SUPPORT system that maintains EU farm prices at levels in excess of world market prices. The prices of milk, cereals, butter, sugar, pork, beef, veal, certain fruits and vegetables and table wine are fixed annually and, once determined, are then maintained at this level by support-buying of output that is not bought in the market. MONETARY COMPENSATION AMOUNTS are used to convert the common price for each product into national currencies and to realign prices when the exchange rates of members’ currencies change;
(b) variable TARIFF rates are used to increase import prices to internal price-support levels in the cases of the products referred to above, thus ensuring that EU output is fully competitive. The 25% of EU farm produce that is not subject to direct price-support relies entirely on tariff protection to maintain high domestic prices;
(c) EXPORT SUBSIDIES are used to enable EU farmers to lower their export prices and thus compete successfully in world markets;
(d) grants are given to facilitate farm modernization and improvements as a means of improving agricultural efficiency.
The CAP is the largest single component of the EU’s total budget. In 2003 it accounted for 45% of total EU spending. Over 90% of the CAP’s budget in recent years has been spent on price-support and export subsidies.
Although the CAP can claim a number of successes, most notably the attainment of EU self-sufficiency in many food products, critics complain it has many drawbacks: consumers lose out because they are required to pay unnecessarily high prices for food products; resources are misallocated because inefficient, high-cost farmers are overprotected, and too little of the CAP’s resources are devoted to long-term structural reform and modernization of the sector; artificially high prices supported by intervention buying encourage gross overproduction and results in large surpluses (‘mountains’) of produce that are expensive to stockpile and difficult to sell off; subsidized exports from the EU can depress world farm prices, making life even more difficult for the less developed countries, many of which (specifically non-LOMÉ AGREEMENT countries) had already been hard hit by the trade diversionary effects of the EU (see TRADE DIVERSION).
However, the CAP has become less protectionist as a result of the ‘Uruguay Round’ of trade concessions (see WORLD TRADE ORGANIZATION). The EU committed itself (over a six-year period starting in 1995) to reduce its import levies by 36%, reduce its domestic subsidies by 20%, and reduce its export subsidies by 36%. Further reductions are currently being negotiated as part of the ‘Doha Round’. See INCOME SUPPORT.
common currency see EURO.
common external tariff see CUSTOMS UNION, COMMON MARKET.
common law the body of law built up over many years as a result of previous court decisions interpreting legislation. These establish legal precedents that then need to be followed consistently in subsequent court cases. Compare STATUTE LAW.
common market a form of TRADE INTEGRATION between a number of countries in which members eliminate all trade barriers (TARIFFS, etc.) amongst themselves on goods and services and establish a uniform set of barriers against trade with the rest of the world, in particular, a common external tariff (see CUSTOMS UNION). In addition, a common market provides for the free movement of labour and capital across national boundaries. The aim of a common market is to secure the benefits of international SPECIALIZATION, thereby improving members’ real living standards.
The short- and medium-term impact of the formation of a common market is mainly felt through an increase in trade between member countries. TRADE CREATION is typically associated with a reallocation of resources within the market favouring least-cost supply locations and a reduction in prices resulting from the elimination of tariffs and lower production costs. (See GAINS FROM TRADE.)
In addition, a common market can be expected to promote longer-term (dynamic) changes conducive to economic efficiency through:
(a) COMPETITION. The removal of tariffs, etc., can be expected to widen the area of effective competition; high-cost producers are eliminated, while efficient and progressive suppliers are able to exploit new market opportunities;
(b) ECONOMIES OF SCALE. A larger ‘home’ market enables firms to take advantage of economies of large-scale production and distribution, thereby lowering supply costs and enhancing COMPARATIVE ADVANTAGE;
(c) TECHNOLOGICAL PROGRESSIVENESS. Wider market opportunities and exposure to greater competition can be expected to encourage firms to invest and innovate new techniques and products;
(d) INVESTMENT and ECONOMIC GROWTH. Finally, the virtuous circle of rising income per head, growing trade, increased productive efficiency and investment may be expected to combine to produce higher growth rates and real standards of living.
The EUROPEAN UNION is one example of a common market. See ANDEAN PACT.
communism a political and economic doctrine that advocates that the state should own all property and organize all the functions of PRODUCTION and EXCHANGE, including LABOUR. Karl MARX succinctly stated his idea of communism as ‘from each according to his ability, to each according to his needs’. Communism involves a CENTRALLY PLANNED ECONOMY where strategic decisions concerning production and distribution are taken by government as opposed to being determined by the PRICE SYSTEM, as in a market-based PRIVATE ENTERPRISE ECONOMY. China still organizes its economy along communist lines, but in recent years Russia and other former Soviet Union countries and various East European countries have moved away from communism to more market-based economies.
community charge see LOCAL TAX.
company see FIRM.
company formation the process of forming a JOINT-STOCK COMPANY, which involves a number of steps:
(a) the drawing up of a MEMORANDUM OF ASSOCIATION;
(b) the preparation of ARTICLES OF ASSOCIATION;
(c) application to the COMPANY REGISTRAR for a CERTIFICATE OF INCORPORATION;
(d) the issue of SHARE CAPITAL;
(e) the commencement of trading.
company laws a body of legislation providing for the regulation of JOINT-STOCK COMPANIES. British company law encouraged the development of joint-stock companies by establishing the principle of LIMITED LIABILITY and providing for the protection of SHAREHOLDERS’ interests by controlling the formation and financing of companies. The major provisions of UK company law are the 1948, 1976 and 1989 Companies Acts. See ARTICLES OF ASSOCIATION, MEMORANDUM OF ASSOCIATION, FIRM.
company registrar the officer of a JOINT-STOCK COMPANY who is responsible for maintaining an up-to-date SHARE REGISTER and for issuing new SHARE CERTIFICATES and cancelling old share certificates as shares are bought and sold on the STOCK EXCHANGE. Many companies, however, have chosen to subcontract these tasks to specialist institutions, often departments of commercial banks.
The role of the company registrar identified above should not be confused with that of the role of the government’s REGISTRAR OF COMPANIES, who is responsible for supervising all joint-stock companies.
