Applied Economics

Frontmatter

1. How Firms Decide Prices

Abstract

Firms’ objectives are the starting point of this chapter. It examines the relationship between costs and prices, for example by discussing price changes, price stickiness and the sensitivity of consumers to price changes. It then considers price differentiation, the pricing of new products and those in decline, as well as practices such as predatory pricing, discounting and pricing to distributors.

Frank Livesey

2. Small Firms

Abstract

In recent years small firms have increased in importance. This chapter defines them and examines their importance in the UK and in the EU. It then discusses the factors that favour small firms and those that influence their formation. A section on the death of small firms is followed by a discussion of small-firm finance and government policy in this area in the UK and the EU.

Frank Livesey

3. How Firms Grow

Abstract

If small firms are growing in importance, large ones still dominate and this chapter examines their share of economic activity in a range of countries. The motives for firms’ growth are considered, and economies of scale and cooperative ventures are discussed in some detail. A discussion of horizontal and vertical growth is followed by a section on diversification, an examination of internal and external growth, and a review of the growth of medium-sized firms. A survey of research on diversification and refocusing is illustrated by a number of European examples, and the chapter concludes with an examination of the relationship between growth and profitability.

Frank Livesey

4. Oligopoly and Monopoly

Abstract

This chapter begins by examining concentrated markets in Europe and then looks at various models of concentrated markets, including oligopoly and cartels, before examining the evidence on pricing in oligopoly and product differentiation. A section on game theory is followed by an examination of barriers to entry. There is also a discussion of the relationship between concentration and profitability and market share and profitability, and the chapter concludes by looking at innovation in this context.

Frank Livesey

5. Competition Policy

Abstract

If market structure can lead to consumer exploitation, then governments should intervene to remedy this. The chapter begins by considering UK and European legislation, concerning first structure and then firms’ conduct. In doing this it considers a number of specific examples of government intervention and looks in particular at mergers and monopoly legislation. Restrictive trade practices are another potential source of market failure and, again, European as well as UK examples are discussed. The chapter ends with a critique of policy. (Note that competition policy as it relates to the privatized utilities is discussed in the next chapter.)

Frank Livesey

6. Privatization

Abstract

After defining privatization, this chapter examines its aims and the extent to which these have been achieved; for example, does it lead to increased efficiency? Casestudies of particular industries are then given so as to examine various aspects such as pricing policy and industry structure. The chapter also includes an examination of privatization in various European countries.

Frank Livesey

7. Multinationals

Abstract

The top 200 multinational companies control about a third of the world’s output. After discussing their importance, this chapter builds models to explain their existence and then examines sectoral and geographical trends, focusing on the European scene. There follows a sectoral analysis of multinationals and a discussion of attitudes towards inward foreign investment. The chapter concludes by examining multinational pricing policies.

Frank Livesey

8. Labour Markets

Abstract

This chapter sets out the standard economic analysis of the supply and demand for labour, and in doing so discusses particular aspects such as the impact of changes in income tax on supply and comparative labour productivity in several countries. It then looks at labour market policy, focusing on market flexibility and a national minimum wage.

Stephen Smith

9. Poverty

Abstract

Poverty is difficult to define, because in Europe at least it is a relative concept. This chapter analyses that problem and then summarizes recent findings. It then discusses various benefits that are available to those in poverty, before moving on to give a world perspective on the problem. Finally, there is a discussion of possible policies.

Bob Milward

10. Social Policy: Health and Education

Abstract

Health and education are both large industries, predominantly in the public sector, where efforts have been made to introduce market forces. After discussing the size of these industries, the chapter then discusses the move to markets, and the assumptions underlying the efficiency of markets in these industries. It then moves on to analyse intervention and various reforms, first in education and then in health care systems.

Brian Atkinson

11. Housing

Abstract

Housing has several characteristics that differentiate it from other products. Housing tenure is one aspect discussed here and this is followed by a section on house prices. Owner occupation is discussed in the UK and also elsewhere in Europe. Another feature of housing is the extent of provision by public authorities, so that government policy has an enormous effect. In recent years, selling off council houses has made this one of the largest privatization, and in addition the chapter discusses social housing elsewhere in Europe. There is also a discussion of the private rented sector in the UK and the rest of Europe, and finally a section on the housebuilding industry and the affordability of housing.

Paul Balchin

12. Environment

Abstract

The background to this chapter is the work by Malthus on population and, more recently, by the Club of Rome. The discussion moves on next to the twin problems of global pollution and deforestation, which is followed by an analysis of market failure in this context. Specific proposals such as tradable permits, a pollution tax and direct regulation are analysed. The chapter then discusses recent international negotiations such as the Rio and Kyoto conferences, before concluding with a short section on sustainable development.

Bob Milward

13. Regional Policy

Abstract

This chapter examines the theoretical basis for regional policy, then concentrates on the nature, extent and trends in regional policy and problems in the UK and in the EU as a whole. In doing so, it also assesses particular aspects of regional policy, such as urban policy and the effectiveness of policy in this area.

Paul McKeown

14. Agriculture

Abstract

Agriculture is different: every developed country gives special support to its farmers. This chapter begins by analyzing the structure of European agriculture and agricultural demand and supply. It then discusses the objectives and problems of agricultural support policies in the EU, in particular the MacSharry reforms and the likely directions of future policy.

David Colman, Jeremy Franks

15. The Motor Industry

Abstract

The motor industry has huge economic effects. This chapter examines the costs of production and economies of scale in the industry. After this comes a section on demand for motor vehicles, followed by a discussion of various aspects of the industry’s structure such as concentration in car production and commercial vehicles. The chapter then examines the behaviour of firms including pricing policy, investment and R&D. Employment and performance in the industry are analyzed, before a concluding look at EU policy in this area.

Garel Rhys

16. The Service Industries

Abstract

This chapter begins by discussing the problem of classifying these industries before going on to deal with productivity and prices in a range of countries. It also discusses economic aspects, such as employment and value added, of the service industries in Britain and in other European countries. Particular service industries such as retailing, tourism and financial services are then analysed as exemplars of the sector.

Frank Livesey

17. Spending and Saving

Abstract

Consumption and saving decisions have important effects on individuals and on the whole economy. The chapter begins by examining recent trends in consumption and saving in the major European economies, before setting up a framework for analysis. It then examines the life cycle and permanent income hypotheses, and the Keynesian consumption function. An explanation is given of recent patterns of European consumption and saving, for example, by discussing the effect of financial liberalization. Finally comes an analysis of changes in the UK patterns of spending and saving, including the effect of recent building society windfalls.

Julia Darby, Jonathan Ireland

18. Investment

Abstract

Investment is important, both in generating future income and because its fluctuations have important effects on the economy. This chapter begins by defining various terms, then analyses the determinants of fixed investment such as the accelerator. It next explains the investment slowdown that has occurred in many countries since the early 1970s. A short section following that discusses other forms of investment, before an analysis is given of the relationship between investment and growth.

Michael Kitson

19. Public Expenditure

Abstract

Public spending affects us all; this chapter begins by discussing historic rationales for government spending, before looking at current arguments for state intervention. Contemporary issues such as budget consolidation in a variety of countries are examined, before the discussion moves on to the national debt and the public sector borrowing requirement. The chapter concludes with a brief look at local government and the private finance initiative.

Bob Milward

20. Taxation

Abstract

This chapter begins by discussing the theoretical context of taxation: what makes a good tax? It therefore analyses such concepts as optimal taxation, efficiency and equity, before moving on to discuss contemporary issues such as the move towards indirect taxation. The chapter concludes with an examination of capital and indirect taxes.

Bob Milward

21. Money and Monetary Policy

Abstract

This chapter begins by exploring the difficulties involved in defining ‘money’. It next introduces various approaches to monetary policy, including the idea of rules, such as a target for the exchange rate. There follows a discussion of the supply of money, which makes use of the money creation equation before focusing on the transmission mechanism of monetary policy. The chapter concludes by discussing credit rationing, which exists because both corporate and personal borrowers cannot always borrow as much as they would like, and shows that rational behaviour by credit lending agencies will lead to economic problems.

David Gowland

22. Inflation

Abstract

This chapter begins by discussing the definition and measurement of inflation. A section on the history of inflation is followed by an analysis of the costs of inflation and of its causes. This section includes comments on the Phillips curve and on monetarism, and the chapter ends with a section on inflation policy.

Brian Atkinson

23. Unemployment

Abstract

This chapter begins by describing the problems of defining and measuring unemployment, and then uses this as a basis for the examination of recent unemployment history. The characteristics of the unemployed are then discussed, including the regional distribution and the extent of unemployment among the young, old and ethnic minorities. The costs of unemployment are discussed and this is followed by an analysis of types of unemployment and recent approaches to unemployment such as the efficiency wages argument, and the suggestion that unemployment can result from the division of the labour market into insiders and outsiders.

Brian Atkinson

24. International Trade

Abstract

This chapter begins by briefly discussing the pattern of international trade. It then moves on to discuss the work of the GATT and its successor, the World Trading Organization, so laying the basis for a discussion of the reasons why countries trade and a critique of the free trade argument, including an examination of the case for protection. This leads to an analysis of various types of protection such as tariffs and non-tariff barriers. The chapter concludes with a section explaining the patterns of trade and a discussion of regional trade blocs.

Brian Atkinson

25. Economic Aspects of the European Treaties

Abstract

The various treaties setting up and then developing the European Union have enormous economic effects, yet are little known. This chapter begins by describing the main features of the Treaty of Rome, the treaty which is the foundation on which the Union rests. This is followed by a section on the Single European Act of 1987, which was concerned with the development of a single market and laid down procedures for removing barriers to trade. There follows a description of the Maastricht Treaty, properly called the Treaty on European Union, Including sections on the social chapter. Other aspects of the EU are also described, including its budget and the chapter concludes with sections on the Amsterdam conference of 1997 and enlarging the EU. (Note that Monetary Union is discussed in Chapter 26.)

Brian Atkinson

26. Economic and Monetary Union

Abstract

After discussing the background to EMU, this chapter discusses the Maastricht plan, including the criteria for the introduction of a single currency and criticisms made of these criteria and the timetable for its introduction. This is followed by a section outlining the theory of optimal currency areas and the case for and against a single currency. The chapter concludes with a section on the relationship between those countries that join and those that do not, and the position of the European Central Bank.

Brian Atkinson

27. Underdevelopment

Abstract

After a brief introduction, this chapter begins by discussing the problems of definition and measurement in this context, focusing in particular on the Human Development Index. It then discusses various theories of development; stages of growth theories, dependency theory, neo-classical theory and finally an endogenous theory of economic growth. This leads to an analysis of policies for development such as import-substitution industrialization and export-orientated industrialization, before a concluding section on the developmental state.

Bob Milward

28. The Asian Tigers

Abstract

‘Asian Tigers’ is the name given to the extremely successful economies of East Asia. This chapter begins by defining the group, then analyses their strategies for success, in particular their emphasis on export-oriented industrialization. It then describes the economic role of the state in these countries. The chapter looks next at Japan, which has provided a model for many of these countries, before concluding with an examination of the contemporary position.

Bob Milward

29. Finding Out in Economics

Abstract

There is an enormous amount of information available on economic matters, but how to find it? This chapter begins by describing the kind of keywords needed to begin a search and how to maintain control of the material found. It then explains technical terms such as CD-ROM and outlines the main book sources, for example the British National Bibliography. Journal sources, both book and electronic, are discussed, as is the Internet. The chapter briefly describes other sources of information such as the government and companies, and also statistical sources for the UK, other parts of Europe and elsewhere. The chapter concludes by giving several examples of search strategies.

Christine Ironfield

Backmatter