consumption expenditure the proportion of NATIONAL INCOME or DISPOSABLE INCOME spent by HOUSEHOLDS on final goods and services. Consumption expenditure is the largest component of AGGREGATE DEMAND and spending in the CIRCULAR FLOW OF NATIONAL INCOME. It is one of the most stable components of aggregate demand, showing little fluctuation from period to period.
In 2003, consumption expenditure accounted for 52% of gross final expenditure (GFE) on domestically produced output (GFE minus imports = GROSS DOMESTIC PRODUCT). See Fig. 132 (b), NATIONAL INCOME ACCOUNTS. See CONSUMPTION SCHEDULE, VEBLEN EFFECT.
consumption function a statement of the general relationship between the dependent variable, CONSUMPTION EXPENDITURE, and the various independent variables that determine consumption, such as current DISPOSABLE INCOME and income from previous periods and WEALTH. See CONSUMPTION SCHEDULE, LIFE-CYCLE HYPOTHESIS, PERMANENT-INCOME HYPOTHESIS, WEALTH EFFECT.
consumption possibility line see BUDGET LINE.
consumption schedule a schedule depicting the relationship between CONSUMPTION EXPENDITURE and the level of NATIONAL INCOME or DISPOSABLE INCOME, also called consumption function. At low levels of disposable income, households consume more than their current income (see DISSAVING), drawing on past savings, borrowing or selling assets in order to maintain consumption at some desired minimum level (AUTONOMOUS CONSUMPTION). At higher levels of disposable income, they consume a part of their current income and save the rest (see SAVING). See Fig. 33. See INDUCED CONSUMPTION.
Fig. 33 Consumption schedule. A simple consumption schedule that takes the linear form C = a + bY, where C is consumption and a is the minimum level of consumption expenditure at zero-disposable income (autonomous consumption). Thereafter consumption expenditure increases as income rises (induced consumption), and b is the proportion of each extra £ (pound) of disposable income that is spent. The 45-degree line OE shows what consumption expenditure would have been had it exactly matched disposable income. The difference between OE and the consumption schedule indicates the extent of dissavings or SAVINGS at various income levels. The slope of the consumption schedule is equal to the MARGINAL PROPENSITY TO CONSUME. See SAVINGS SCHEDULE, LIEE-CYCIE HYPOTHESIS, PERMANENT-INCOME HYPOTHESIS.
contestable market a MARKET where new entrants face costs similar to those of established firms and where, on leaving, firms are able to recoup their capital costs, less depreciation. Consequently, it is not possible for established firms to earn ABOVE NORMAL PROFIT as this will be eroded by the entry of new firms, or, alternatively, the mere threat of such new entry may be sufficient to ensure that established firms set prices that yield them only a NORMAL PROFIT return. Perfectly competitive markets (see PERFECT COMPETITION) are all contestable, but even some oligopolistic markets (see OLIGOPOLY) may be contestable if entry and exit are easily affected.
In recent times many markets have been opened up by a number of developments, including increasing international competition as trade barriers have been reduced, the introduction of FLEXIBLE MANUFACTURING SYSTEMS and E-COMMERCE trading on the INTERNET. See WORKABLE COMPETITION, CONDITION OF ENTRY, BARRIERS TO ENTRY, BARRIERS TO EXIT.
contingency theory the proposition that the best organization structure for a particular firm depends upon the specific circumstances that it faces and that there is no uniformly best organization structure for all firms in all circumstances. The appropriate organizational structure for a firm in particular circumstances seeks to balance ECONOMIES OF SCALE and ECONOMIES OF SCOPE in production and distribution; TRANSACTION COSTS; AGENCY COSTS; and information flows.
contract a legally enforceable agreement between two or more people or firms generally relating to a TRANSACTION for the purchase or sale of goods and services. Contracts may take a standardized form, with the same conditions of exchange being applied to every one of a large number of contracts, for example, airline ticket contracts. Alternatively, contracts may be lengthy and complicated because they are carefully tailored to a specific transaction such as the contract to build an office block for a client.
A complete contract stipulates each party’s responsibilities and rights for every contingency that could conceivably arise during the transaction. Such a complete contract would bind the parties to particular courses of action as the transaction unfolds, with neither party having any freedom to exploit weaknesses in the other’s position. It is difficult to develop complete contracts since parties to the contract must be able to specify every possible contingency and the required responses by the contracting parties, to stipulate what constitutes satisfactory performance, to measure performance, to make the contract enforceable and to have access to complete information about circumstances surrounding the contract.
In practice, most contracts are incomplete contracts in which the precise terms of the contract relating to product specifications, supply or delivery terms cannot be fully specified. In such situations, one or other parties to the agreement may be tempted to take advantage of the open-endedness or ambiguity of the contract at the expense of the other party. See ADVERSE SELECTION, MORAL HAZARD, ASYMMETRY OF INFORMATION, ASSET SPECIFICITY.
contract curve see EDGEWORTH BOX.
contractor a person or firm that enters into a CONTRACT enforceable in law with another person or firm to supply goods or services. For example, a house builder may employ contractors to undertake the plumbing work involved in the construction of houses rather than do this work itself. The plumbing contractor would provide, for the contract price, all piping, wire, tanks, etc., needed, plus the specialist workers to install them. In turn, the plumber may enter into an agreement with a subcontractor to install the time clocks and electrical controls for the central heating system.
contribution the difference between a product’s SALES REVENUE and its VARIABLE COSTS. If total contributions are just large enough to cover FIXED COSTS then the producer BREAKS EVEN; if contributions are less than fixed costs, the producer makes a LOSS; while if contributions exceed fixed costs then the producer makes a PROFIT. See LOSS MINIMIZATION, MARGINAL COST PRICING.
control loss see AGENCY COST.
conventional sequence see REVISED SEQUENCE.
convertibility the extent to which one foreign currency or INTERNATIONAL RESERVE ASSET can be exchanged for some other foreign currency or international reserve asset.
International trade and investment opportunities are maximized when the currencies used to finance them are fully convertible, i.e. free of FOREIGN EXCHANGE CONTROL restrictions.
convertible loans long-term LOANS to a JOINT-STOCK COMPANY that may be converted at the option of the lender into ORDINARY SHARES at a predetermined share price.
conveyance a document that transfers the legal ownership of land and buildings from one person/business to another person/business. See MORTGAGE.
cooperation 1 the process whereby FIRMS seek to coordinate their pricing and output policies rather than compete with one another in order to achieve JOINT-PROFIT MAXIMIZATION. See MUTUAL INTERDEPENDENCE, OLIGOPOLY.
2 the process whereby individuals coordinate their work in TEAMS.
cooperative a form of business FIRM that is owned and run by a group of individuals for their mutual benefit. Examples of cooperatives include:
(a) worker or producer cooperatives: businesses that are owned and managed by their employees, who share in the net profit of the business.
(b) wholesale cooperatives: businesses whose membership comprises a multitude of small independent retailers. The prime objective of such a group is to use its combined BULK-BUYING power to obtain discounts and concessions from manufacturers, similar to those achieved by larger SUPERMARKET chains.
(c) retail cooperatives: businesses