To make clear to the borrower the actual charge for credit and the ‘true’ rate of interest, the CONSUMER CREDIT ACT 1974 requires lenders to publish both rates to potential borrowers.
a priori adj. known to be true, independently of the subject under debate. Economists frequently develop their theoretical models by reasoning, deductively, from certain prior assumptions to general predictions.
For example, operating on the assumption that consumers behave rationally in seeking to maximize their utility from a limited income, economists’ reasoning leads them to the prediction that consumers will tend to buy more of those products whose relative price has fallen. See ECONOMIC MAN, CONSUMER EQUILIBRIUM
arbitrage the buying or selling of PRODUCTS, FINANCIAL SECURITIES or FOREIGN CURRENCIES between two or more MARKETS in order to take profitable advantage of any differences in the prices quoted in these markets. By simultaneously buying in a low-price market and selling in the high-price market a dealer can make a profit from any disparity in prices between them, though in the process of buying and selling the dealer will add to DEMAND in the low-price market and add to SUPPLY in the high-price market, so narrowing or eliminating the price disparity. See SPOT MARKET, FUTURES MARKET, COVERED INTEREST ARBITRAGE.
arbitration a procedure for settling disputes, most notably INDUSTRIAL DISPUTES, in which a neutral third party or arbitrator, after hearing presentations from all sides in dispute, issues an award binding upon each side. Arbitration is mostly used only as a last resort when normal negotiating proceedings have failed to bring about an agreed settlement. In the UK, the ADVISORY CONCILIATION AND ARBITRATION SERVICE (ACAS) acts in this capacity. See MEDIATION, COLLECTIVE BARGAINING, INDUSTRIAL RELATIONS.
arc elasticity a rough measure of the responsiveness of DEMAND or SUPPLY to changes in PRICE, INCOME, etc. In the case of PRICE ELASTICITY OF DEMAND, it is the ratio of the percentage change in quantity demanded (Q) to the percentage change in price (P) over a price range such as P0 to P1 in Fig. 8. Arc elasticity of demand is expressed notationally as:
where P0 = original price, Q0 = original quantity, P1 = new price, Q1 = new quantity. Because arc elasticity measures the elasticity of demand (e) over a price range or arc of the demand curve, it is only an approximation of demand elasticity at a particular price (POINT ELASTICITY). However, the arc elasticity formula gives a reasonable degree of accuracy in approximating point elasticity when price and/or quantity changes are small. See also ELASTICITY OF DEMAND.
articles of association the legal constitution of a JOINT-STOCK COMPANY that governs the internal relationship between the company and its members or SHAREHOLDERS. The articles govern the rights and duties of the membership and aspects of administration of the company. They will contain, for instance, the powers of the directors, the conduct of meetings, the dividend and voting rights assigned to separate classes of shareholders, and other miscellaneous rules and regulations. See MEMORANDUM OF ASSOCIATION.
ASA see ADVERTISING STANDARDS AUTHORITY.
ASEAN see ASSOCIATION OF SOUTHEAST ASIAN NATIONS.
Asian Pacific Economic Cooperation (APEC) a regional alliance formed in 1990 with the general objective of establishing a FREE TRADE AREA, specifically creating a free trade zone for industrialized country members by 2010 and for developing country members by 2020. There are currently 17 members of APEC: USA, Canada, Japan, China/Hong Kong, Mexico, Chile, Australia, New Zealand, Papua New Guinea, South Korea, Taiwan, Thailand, Philippines, Brunei, Malaysia, Singapore and Indonesia. The USA, Canada and Mexico are also members of the NORTH AMERICAN FREE TRADE AGREEMENT (NAFTA), and Brunei, Indonesia, Malaysia, Philippines, Singapore and Thailand are also members of the ASSOCIATION OF SOUTHEAST ASIAN NATIONS (ASEAN). See TRADE INTEGRATION.
ask price see BID PRICE.
Fig. 8 Arc elasticity. See entry.
asset an item or property owned by an individual or a business that has a money value. Assets are of three main types: (a) physical assets, such as plant and equipment, land, consumer durables (cars, washing machines, etc);
(b) financial assets, such as currency, bank deposits, stocks and shares;
(c) intangible assets, such as BRAND NAMES, KNOW-HOW and GOODWILL. See INVESTMENT, LIQUIDITY, BALANCE SHEET, LIABILITY.
asset-growth maximization a company objective in the THEORY OF THE FIRM that is used as an alternative to the traditional assumption of PROFIT MAXIMIZATION. Salaried managers of large JOINT-STOCK COMPANIES are assumed to seek to maximize the rate of growth of net assets as a means of increasing their salaries, power, etc., subject to maintaining a minimum share value, so as to avoid the company being taken over with the possible loss of jobs. In Fig. 9, the rate of growth of assets is shown on the horizontal axis, and the ratio of the market value of company shares to the book value of company net assets (the share-valuation ratio) on the vertical axis. The valuation curve rises at first, as increasing asset growth increases share value but beyond growth rate (G) excessive retention of profits to finance growth will reduce dividend payments to shareholders and depress share values. Managers will tend to choose the fastest growth rate (G*), which does not depress the share valuation below the level (V1) at which the company risks being taken over. See also MANAGERIAL THEORIES OF THE FIRM, FIRM OBJECTIVES, DIVORCE OF OWNERSHIP FROM CONTROL, PRINCIPAL-AGENT THEORY.
asset specificity the extent to which a TRANSACTION or CONTRACT needs to be supported by transaction-specific assets. Where a contract involves the need to create transaction-specific assets, this creates a fundamental transformation in the nature of the relationship between the parties to the transaction. Before investing in specific assets, the investing partner is likely to have many alternative trading partners, which allows for bidding competition. However, after the investment creates transaction-specific assets these become SUNK COSTS with no alternative use and the parties to the transaction then have no alternative trading partners. The terms of the transaction are then determined by bilateral bargaining between the parties to the transaction.
Bargaining between the parties can lead to opportunistic behaviour where one party in a contractual relationship seeks to exploit the other’s vulnerability. For example, a seller might attempt to exploit a buyer who is dependent on the seller by claiming that the production costs have risen and pressing for an upward adjustment of the negotiated price. Such opportunistic behaviour seeks to exploit or ‘hold up’ one party to the transaction to benefit the other party
Fig. 9 Asset-growth maximization. The variation of share valuation ratio against the company growth rate.
For transactions with high asset specificity, the costs of MARKET transactions are high and such transactions are likely to be ‘internalized’ and conducted within organizations, for example a VERTICALLY INTEGRATED firm. See INTERNALIZATION.
asset-stripper a predator firm