Economics. Dr. Pass Christopher

of existing firms and the establishment of new industries by offering a variety of investment incentives: investment grants and allowances, tax write-offs, rent- and rate-free (or reduced) factories, etc.

      In the UK, firms investing in the assisted areas are offered REGIONAL SELECTIVE ASSISTANCE, which is given on a discretionary basis to cover capital and training costs for projects that meet specified job-creation criteria.

      development economics the branch of economics that seeks to explain the processes by which a DEVELOPING COUNTRY increases in productive capacity, both agricultural and industrial, in order to achieve sustained ECONOMIC GROWTH.

      Much work in development economics has focused on the way in which such growth can be achieved, for instance, the question of whether agriculture ought to be developed in tandem with industry, or whether leading industries should be allowed to move forward independently, so encouraging all other sectors of society. Another controversial question is whether less developed countries are utilizing the most appropriate technology. Many economists argue for intermediate technology as most appropriate rather than very modern plants initially requiring Western technologists and managers to run them. Socio-cultural factors are also influential in attempting to achieve take-off into sustained economic growth. See ECONOMIC DEVELOPMENT, INFANT INDUSTRY.

      differentiated product see PRODUCT DIFFERENTIATION.

      differentiation competition strategy see COMPETITIVE STRATEGY.

      diffusion the process whereby INNOVATIONS are accepted and used by firms and consumers through imitation, licensing agreements or sale of products and patents.

      diminishing average returns see DIMINISHING RETURNS.

      diminishing marginal rate of substitution see MARGINAL RATE OF SUBSTITUTION.

      diminishing marginal returns see DIMINISHING RETURNS.

      diminishing marginal utility a principle that states that as an individual consumes a greater quantity of a product in a particular time period, the extra satisfaction (UTILITY) derived from each additional unit will progressively fall as the individual becomes satiated with the product. See Fig. 45.

      The principle of diminishing MARGINAL UTILITY can be used to explain why DEMAND CURVES for most products are downward sloping, since if individuals derive less satisfaction from successive units of the product they will only be prepared to pay a lower price for each unit.

      Demand analysis can be conducted only in terms of diminishing marginal utility if CARDINAL UTILITY measurement is possible. In practice, it is not possible to measure utility precisely in this way, so demand curves are now generally constructed from INDIFFERENCE CURVES, which are based upon ORDINAL UTILITY. See CONSUMER EQUILIBRIUM, REVEALED PREFERENCE.

      diminishing returns the law in the SHORT-RUN theory of supply of diminishing marginal returns or variable factor proportions that states that as equal quantities of one VARIABLE FACTOR INPUT are added into the production function (the quantities of all other factor inputs remaining fixed), a point will be reached beyond which the resulting addition to output (that is, the MARGINAL PHYSICAL PRODUCT of the variable input) will begin to decrease, as shown in Fig. 46.

      As the marginal physical product declines, this will eventually cause AVERAGE PHYSICAL PRODUCT to decline as well (diminishing average returns). The marginal physical product changes because additional units of the variable factor input do not add equally readily to units of the fixed factor input.

      Fig. 45 Diminishing marginal utility. To a hungry man the utility of the first slice of bread consumed will be high (O₂) but as his appetite becomes satiated, successive slices of bread yield smaller and smaller amounts of satisfaction; for example, the fifth slice of bread yields only O_b of additional utility.

      At a low level of output, marginal physical product rises with the addition of more variable inputs to the (underworked) fixed input, the extra variable inputs bringing about a more intensive use of the fixed input.

      Fig. 46 Diminishing returns. The rise and fall of units of output as units of variable factor input are added to the production function.

      Eventually, as output is increased, an optimal factor combination is attained at which the variable and fixed inputs are mixed in the most appropriate proportions to maximize marginal physical product. Thereafter, further additions of variable inputs to the (now overworked) fixed input leads to a less than proportionate increase in output so that marginal physical product declines. See RETURNS TO THE VARIABLE FACTOR INPUT.

      direct cost the sum of the DIRECT MATERIALS COST and DIRECT LABOUR COST of a product. Direct cost tends to vary proportionately with the level of output. See VARIABLE COST.

      direct debit see COMMERCIAL BANK.

      direct investment any expenditure on physical ASSETS such as plant, machinery and stocks. See INVESTMENT.

      directive (bank) an instrument of MONETARY POLICY involving the control of bank lending as a means of regulating the MONEY SUPPLY. If, for example, the monetary authorities wish to lower the money supply, they can ‘direct’ the banks to reduce the total amount of loan finance made available to personal and corporate borrowers. A reduction in bank lending can be expected to lead to a multiple contraction of bank deposits and, hence, a fall in the money supply. See BANK DEPOSIT CREATION.

      direct labour 1 that part of the labour force in a firm that is directly concerned with the manufacture of a good or the provision of a service. Contrast INDIRECT LABOUR.

      2 workers employed directly by local or central government to perform tasks rather than contracting out such tasks to private-sector companies. For example, a local authority might employ its own permanent construction workers to repair council houses rather than putting such repair work out to local firms. See VARIABLE COST, PRIVATIZATION.

      direct marketing see DIRECT SELLING.

      direct materials raw materials that are incorporated in a product. Compare INDIRECT MATERIALS. See VARIABLE COST.

      direct selling/marketing a method of selling and buying goods and services that enables a supplier to sell direct to the final customer without the need for traditional ‘middlemen’ – wholesalers and retailers. Direct selling can be undertaken through catalogues (see MAIL ORDER) or by ‘clip-out’ coupons in newspapers, but increasingly it is being undertaken by telephone sales (e.g. telephone banking and insurance) and through e-commerce (INTERNET sales). Direct selling can provide firms with an effective means of tapping into a mass market; it can reduce BARRIERS TO ENTRY so that some small firms can offer their products alongside big-name companies; and by eliminating the ‘middleman’, selling costs and prices can be lowered, conferring COMPETITIVE ADVANTAGE. Apart from lower prices, another attraction for customers is the convenience of being able to ‘shop’ from home rather than having to visit a retail outlet.

      direct tax a TAX levied by the government on the income and wealth received by individuals (households) and businesses in order to raise revenue and as an instrument of FISCAL POLICY. Examples of a direct tax are INCOME TAX, NATIONAL INSURANCE CONTRIBUTIONS, CORPORATION TAX and WEALTH TAX.

      Direct taxes are incurred on income received, unlike indirect taxes, such as value-added taxes, that are incurred when income is spent. Direct taxes are progressive, insofar as the amount paid varies according to the income and wealth of the taxpayer. By contrast, INDIRECT TAX is regressive, insofar as the same amount is paid by each tax-paying consumer regardless of his or her income. See TAXATION, PROGRESSIVE TAXATION, REGRESSIVE TAXATION.

      dirty float the manipulation by the monetary authorities