a product, measured on an absolute scale. This implies that the exact amount of utility derived from consuming a product can be measured, and early economists suggested that utility could be measured in discrete units referred to as UTILS. However, because it proved impossible to construct an accurate measure of cardinal utility, ORDINAL UTILITY measures replaced the idea of cardinal utility in the theory of CONSUMER EQUILIBRIUM. See DIMINISHING MARGINAL UTILITY.
cartel a form of COLLUSION between a group of suppliers aimed at suppressing competition between themselves, wholly or in part. Cartels can take a number of forms. For example, suppliers may set up a sole selling agency that buys up their individual output at an agreed price and arranges for the marketing of these products on a coordinated basis. Another variant is when suppliers operate an agreement (see RESTRICTIVE TRADE AGREEMENT) that sets uniform selling prices for their products, thereby suppressing price competition but with suppliers then competing for market share through PRODUCT DIFFERENTIATION strategies. A more comprehensive version of a cartel is the application not only of common selling prices and joint marketing but also restrictions on production, involving the assignment of specific output quotas to individual suppliers, and coordinated capacity adjustments, either removing over-capacity or extending capacity on a coordinated basis.
Cartels are usually established with the purpose of either exploiting the joint market power of suppliers to extract MONOPOLY profits or as a means of preventing cut-throat competition from forcing firms to operate at a loss, often resorted to in times of depressed demand (a so-called ‘crisis cartel’). In the former case, a central administration agency could determine the price and output of the industry, and the output quotas of each of the separate member firms, in such a way as to restrict total industry output and maximize the joint profits of the group. Price and output will thus tend to approximate those of a profit-maximizing monopolist. See Fig. 21.
A number of factors are crucial to the successful operation of a cartel, in particular the participation of all significant suppliers of the product and their full compliance with the policies of the cartel. Non-participation of some key suppliers and ‘cheating’ by cartel members, together with the ability of buyers to switch to substitute products, may well serve to undermine a cartel’s ability to control prices. In many countries, including the UK, the USA and the European Union, cartels concerned with price fixing, market sharing and restrictions on production and capacity are prohibited by law. See COMPETITION POLICY (UK), COMPETITION POLICY (EU), ORGANIZATION OF PETROLEUM-EXPORTING COUNTRIES (OPEC).
Fig. 21 Cartel. D is the industry demand curve, showing the aggregate quality that the combined group may sell over a range of possible prices and MR is the industry marginal revenue curve. The industry marginal cost curve ΣMC is constructed from the marginal cost curves of the individual firms making up the cartel. For any given level of industry output, the cartel is required to calculate the allocation of the output among member firms on the basis of their individual marginal costs to obtain the lowest possible aggregate cost of producing their output. To maximize industry profit, the cartel will set price OP and produce output OQ. Quotas of QA and QB are given to firms A and B respectively where a horizontal line drawn from the intersection of MR and ΣMC (the line of aggregate marginal costs) intersects MCA and MCB. Profit contributed by each firm is computed by multiplying the number of units produced by the difference between industry price and the firm’s average cost at that level of output. The aggregate profit is then divided among the member firms in some agreed manner, not necessarily, it is to be noted, in the same proportion as actually contributed by each of the individual firms. Disputes over the sharing of aggregate profit frequently lead to the break-up of cartels.
cash see CURRENCY.
cash and carry a form of wholesaling that requires customers (predominantly RETAILERS) to pay cash for products bought and to collect these products themselves from a warehouse. See DISTRIBUTION CHANNEL.
cash card see COMMERCIAL BANK.
cash discount see DISCOUNT.
cash drain a constraint on the expansion of the MONEY SUPPLY through BANK DEPOSIT CREATION, caused by individuals retaining larger amounts of cash than usual. This means that not all of the increase in cash calculated by using the reciprocal of the RESERVE ASSET RATIO is passed on from the public back into the banking system. For example, a new deposit of £100 is made into the banking system. Assuming a 10% reserve asset ratio, the average fraction of money held in cash form is one-tenth and the reciprocal 10. Thus ultimately a £1,000 increase in money supply is theoretically possible. If the public’s demand for cash grows, however, then the increase in the money supply will not be 10 times the initial deposit, but something less.
cash flow the money coming into a business from sales and other receipts and going out of the business in the form of cash payments to suppliers, workers, etc.
cash limits a means of controlling public sector spending by setting maximum expenditure totals for government departments or nationalized industries, deliberately making no allowance for inflation. See GOVERNMENT (PUBLIC) EXPENDITURE.
cash ratio see CASH RESERVE RATIO.
cash reserve ratio the proportion of a COMMERCIAL BANK’S total assets that it keeps in the form of highly liquid assets to meet day-to-day currency withdrawals by its customers and other financial commitments. The cash reserve ratio comprises TILL MONEY (notes and coins held by the bank) and its operational BALANCES WITH THE BANK OF ENGLAND. The cash reserve ratio is a narrowly defined RESERVE ASSET RATIO that can be used by the monetary authorities to control the MONETARY BASE of the economy. See BANK DEPOSIT CREATION, MONETARY BASE CONTROL, MONETARY POLICY.
CAT see COMPETITION APPEALS TRIBUNAL.
caveat emptor a Latin phrase meaning ‘let the buyer beware’. Put simply, this means that the supplier has no legal obligation to inform buyers about any defects in his goods or services. The onus is on the buyer to determine for himself or herself that the good or service is satisfactory. Compare CAVEAT VENDOR.
caveat vendor a Latin phrase meaning ‘let the seller beware’. In brief, this means that the supplier may be legally obliged to inform buyers of any defects in his goods or services. Compare CAVEAT EMPTOR.
census a comprehensive official survey of households or businesses undertaken at regular intervals in order to obtain socioeconomic information. In the UK, a population census has been carried out every 10 years since 1891 to provide information on demographic trends. This data is useful to the government in the planning of housing, education and welfare services. A production census is carried out annually to provide details of industrial production, employment, investment, etc. A distribution census provides data about wholesaling and retailing. This information can be used by the government in formulating its economic and industrial policies.
central bank a country’s leading BANK, generally responsible for overseeing the BANKING SYSTEM, acting as a ‘clearing’ banker for the COMMERCIAL BANKS (see CLEARING HOUSE SYSTEM) and for implementing MONETARY POLICY. In addition, many central banks are responsible for handling the government’s budgetary accounts and for managing the country’s external monetary affairs, in particular the EXCHANGE RATE.
Examples of central banks include the USA’s Federal Reserve Bank, Germany’s Deutsche Bundesbank, France’s Banque de France and the European Union’s EUROPEAN CENTRAL BANK. (For a more detailed discussion of a central bank’s activities see the BANK OF ENGLAND entry.)
centralization
