Fig. 4 Aggregate demand schedule. (a) The graph shows how AGGREGATE DEMAND varies with the level of NATIONAL INCOME. b) Shifts in the schedule because of determining factor changes. For example, if there is an increase in the PROPENSITY TO CONSUME, the consumption schedule will shift upwards, serving to shift the aggregate demand schedule upwards from AD to AD1; a reduction in government spending will shift the schedule downwards from AD to AD2. (c)The graph plots the quantity of real national income demanded against the price level. (d) Shifts in the schedule because of determining factor changes. For example, if there is an increase in the propensity to consume, the aggregate demand schedule will shift rightwards from AD to AD1; a reduction in government spending will shift the schedule leftwards from AD to AD2.
aggregated rebate a trade practice whereby DISCOUNTS on purchases are related not to customers’ individual orders but to their total purchases over a period of time. Aggregated rebate is used to foster buyer loyalty to the supplier, but it can produce anti-competitive effects because it encourages buyers to place the whole of their orders with one supplier, to the exclusion of competing suppliers. Under the Competition Act 1980, 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.
aggregate expenditure see AGGREGATE DEMAND.
aggregate supply the total amount of domestic goods and services supplied by businesses and government, including both consumer products and capital goods. Aggregate supply interacts with AGGREGATE DEMAND to determine the EQUILIBRIUM LEVEL OF NATIONAL INCOME (see AGGREGATE SUPPLY SCHEDULE).
In the short term, aggregate supply will tend to vary with the level of demand for goods and services, although the two need not correspond exactly. For example, businesses could supply more products than are demanded in the short term, the difference showing up as a build-up of unsold STOCKS (unintended INVENTORY INVESTMENT). On the other hand, businesses could supply fewer products than are demanded in the short term, the difference being met by running down stocks. However, discrepancies between aggregate supply and aggregate demand cannot be very large or persist for long, and generally businesses will offer to supply output only if they expect spending to be sufficient to sell all that output.
Over the long term, aggregate supply can increase as a result of increases in the LABOUR FORCE, increases in CAPITAL STOCK and improvements in labour PRODUCTIVITY. See ACTUAL GROSS NATIONAL PRODUCT, POTENTIAL GROSS NATIONAL PRODUCT, ECONOMIC GROWTH.
aggregate supply schedule a schedule depicting the total amount of domestic goods and services supplied by businesses and government at various levels of total expenditure. The AGGREGATE SUPPLY schedule is generally drawn as a 45° line because business will offer any particular level of national output only if they expect total spending (AGGREGATE DEMAND) to be just sufficient to sell all of that output. Thus, in Fig. 5 (a), £100 million of expenditure calls forth £100 million of aggregate supply, £200 million of expenditure calls forth £200 million of aggregate supply, and so on. This process cannot continue indefinitely, however, for once an economy’s resources are fully employed in supplying products then additional expenditure cannot be met from additional domestic resources because the potential output ceiling of the economy has been reached. Consequently, beyond the full-employment level of national product, Yf, the aggregate supply schedule becomes vertical. See POTENTIAL GROSS NATIONAL PRODUCT, ACTUAL GROSS NATIONAL PRODUCT.
Alternatively, the aggregate supply schedule can be expressed in terms of various levels of real national income supplied at each PRICE LEVEL as shown in Fig. 5 (b). This version of the aggregate supply schedule parallels at the macro level the supply schedule and SUPPLY CURVE for an individual product, though in this case the schedule represents the supply of all goods and services and deals with the general price level rather than a particular product price. Fig. 5 (c) shows a shift of the aggregate supply curve to the right as a result of, for example, increases in the labour force or capital stock and technological advances.
Aggregate supply interacts with aggregate demand to determine the EQUILIBRIUM LEVEL OF NATIONAL INCOME.
Fig. 5 Aggregate supply schedule. See entry.
AGM see ANNUAL GENERAL MEETING.
agricultural policy a policy concerned both with protecting the economic interests of the agricultural community by subsidizing farm prices and incomes, and with promoting greater efficiency by encouraging farm consolidation and mechanization.
Fig. 6 Agricultural policy. (a) The short-term shifts in supply (S) and their effects on price (P) and quantity (Q). (b) Long-term shifts caused by the influence of productivity improvement on supply.
The rationale for supporting agriculture partly reflects the ‘special case’ nature of the industry itself: agriculture, unlike manufacturing industry, is especially vulnerable to events outside its immediate control. Supply tends to fluctuate erratically from year to year, depending upon such vagaries as the weather and the incidence of pestilence and disease, S1, S2 and S3 in Fig. 6 (a), causing wide changes in farm prices and farm incomes. Over the long term, while the demand for many basic foodstuffs and animal produce has grown only slowly, from DD to D1D1 in Fig. 6 (b), significant PRODUCTIVITY improvements associated with farm mechanization, chemical fertilizers and pesticides, etc., have tended to increase supply at a faster rate than demand, from SS to S1S1 in Fig. 6 (b), causing farm prices and incomes to fall (see MARKET FAILURE).
Farming can thus be very much a hit-and-miss affair, and governments concerned with the impact of changes in food supplies and prices (on, for example, the level of farm incomes, the balance of payments and inflation rates) may well feel some imperative to regulate the situation. But there are also social and political factors at work; for example, the desire to preserve rural communities and the fact that, even in some advanced industrial countries (for example, the European Union), the agricultural sector often commands a political vote out of all proportion to its economic weight. See ENGEL’S LAW, COBWEB THEOREM, PRICE SUPPORT, INCOME SUPPORT, COMMON AGRICULTURAL POLICY, FOOD AND AGRICULTURAL ORGANIZATION.
aid see ECONOMIC AID.
allocative efficiency an 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