Tutor2u A2 Business Economics Glossary Concept Abnormal profit Agency problem Allocative efficiency Anti-competitive behaviour Asymmetric information Average cost Average cost pricing Average fixed cost (AFC) Average revenue (AR) Average variable cost Backward vertical integration Barriers to entry Behavioural economics Bi-lateral monopoly Brand extension Brand loyalty Break-even output Business ethics Capacity Capital intensive Glossary Entry Profit in excess of normal profit - also known as supernormal profit or monopoly profit. Abnormal profits may be maintained in a monopolistic market in the long run because of barriers to entry Possible conflicts of interest that may result between the shareholders (principal) and the management (agent) of a firm Producing an output demanded by consumers at a price that reflects the marginal cost of supply Strategies designed to limit the degree of competition inside a market and reinforce the monopoly power of established businesses Where different parties have unequal access to information in a market Total cost per unit of output = Total cost / output = TC/Q Setting prices close to average cost. It is a way to maximise sales, whilst maintaining normal profits. It is sometimes known as sales maximization Total fixed cost per unit of output = TFC/Q Total revenue per unit of output = Price/Output Total variable cost per unit of output = TVC/Q Acquiring a business operating earlier in the supply chain e.g. a retailer buys a wholesaler, a brewer buys a hop farm Ways to prevent the profitable entry of new competitors they may relate to differences in costs between existing and new firms. Or the result of strategic behaviour by firms including expensive marketing and advertising spending Branch of research that adds elements of psychology to traditional models in an attempt to better understand decision-making by investors, consumers and other economic participants Where a monopsony buyer faces a monopsony seller in a market Adding a new product to an existing branded group of products The degree to which people regularly buy a particular brand and refuse to or are reluctant to change to other brands The break-even price is when price = average total cost (P=AC) Business ethics is concerned with the social responsibility of management towards the firm s major stakeholders, the environment and society in general The amount that can be produced by a plant or business over a given period of time. When an industry or production process requires a relatively large amount of capital (fixed assets) or proportionately more capital than labour
Cartel Collusion Competition and Markets Authority (CMA) Competition Policy Complex monopoly Concentration ratio Conglomerate merger Consolidation Constant returns Consumer surplus Consumption tax Contestable market Cooperative outcome Corporate strategy Cost synergies Cost-plus pricing Cost-reducing innovations Countervailing power An association of businesses or countries that collude to influence production levels and thus the market price of a particular product Collusion takes place when rival companies cooperate for their mutual benefit. When two or more parties act together to influence production and/or price levels, thus preventing fair competition. Common in an oligopoly / duopoly The CMA has been created by unifying the Competition Commission with most functions of the Office of Fair Trading tackling price fixing, monopolies and unfair mergers Policy which seeks to promote competition and efficiency in different markets and industries A complex monopoly exists if at least one quarter (25%) of the market is in the hands of one or a group of suppliers who, deliberately or not, act in a way designed to reduce competitive pressures within a market Measures the proportion of an industry's output or employment accounted for by the largest firms. When the concentration ratio is high, an industry has moved towards a monopoly, duopoly or oligopoly. Share can be by sales, employment or any other relevant indicator. Joining together of two companies that are different in the type of work they do - the acquisition has no clear connection to the business buying it Consolidation refers to the reduction in the number of competitors in a market and an increase in the total market share held by the remaining firms. When long run average cost remains constant as output increases because output is rising in proportion to the inputs used in the production process The difference between the total amount that consumers are willing and able to pay for a good or service (indicated by the demand curve) and the total amount that they actually pay (the market price). A tax imposed on the consumer of a good or service. This can be levied at the final sale level (sales tax), or at each stage in the production Where an entrant has access to all production techniques available to the incumbents is not prohibited from wooing the incumbent s customers, and entry decisions can be reversed without cost. In a contestable market is that businesses are free to enter and leave the market An equilibrium in a game where the players agree to cooperate A company's aims in general, and the way it hopes to achieve them - strategic objective which supports the achievement of corporative aims Cost synergies are the cost savings that a buyer aims to achieve as a result of taking over or merging with another business Where a firm fixes the price for its product by adding a fixed percentage profit margin to the average cost of production. The size of the profit margin may depend on factors including competition and the strength of demand Cost reducing innovations causing an outward shift in supply. They provide the scope for businesses to enjoy higher profit margins with a given level of demand When the market power of a monopolistic/oligopolistic seller is offset by powerful buyers who can prevent the price from being pushed up
Creative destruction Credit Union Cross-subsidy Deadweight loss De-layering De-merger Deregulation Diminishing returns Diseconomies of scale (internal) Dis-synergies Diversification Divorce between ownership and control Dominant market position Dominant strategy Due Diligence Duopoly Duopsony Dynamic efficiency Economic risk Economies of scale First introduced by Joseph Schumpeter. It refers to the dynamic effects of innovation in markets - for example where new products or business models lead to a reallocation of resources. Some jobs are lost but others are created. Established businesses come under threat Financial co-operatives owned & controlled by members offering banking products A cross subsidy uses profits from one line of business to finance losses in another line of business e.g. Royal Mail and 2 nd class letters Loss in producer & consumer surplus due to an inefficient level of production De-layering involves removing one or more levels of hierarchy from the organizational structure. For example, many high-street banks no longer have a manager in each of their branches The hiving off of one or more business units from a group so that they can operate as independently managed concerns Opening up of markets by reducing barriers to entry. The aim is to increase supply, competition and innovation and bring lower prices for consumers Addition of a variable factor to a fixed factor results in a fall in marginal product A business may expand beyond the optimal size in the long run and experience diseconomies of scale. This leads to rising Long Run Average Cost (LRAC) Negative or adverse effects of a takeover or merger. E.g. disruptions that arise from the deal which result additional costs or lower than expected revenues Increasing the range of products or markets served by a business The owners of a company normally elect a board of directors to control the business s resources for them. However, when the owner of a company sells shares, or takes out a loan to raise finance, they sacrifice some of their control A firm holds a dominant position if it can operate within the market without taking full account of the reaction of its competitors or final consumers A dominant strategy in game theory is one where a single strategy is best for a player regardless of what strategy the other players in the game decide to use Due diligence is the process undertaken by a prospective buyer of a business to confirm the details (e.g. financial performance, assets & liabilities, legal ownership & issues, operations, market position) of what they expect to buy Any market that is dominated by two suppliers Two major buyers of a good or service in a market each of whom is likely to have some buying power with suppliers in their market. Dynamic efficiency focuses on changes in the choice available in a market together with the quality/performance of products that we buy. Economists often link dynamic efficiency with the pace of innovation in a market The risk that a company may be disadvantaged by exchange rate movements or regulatory changes in the country in which it is operating Falling long run average cost as output increases in the long run
Economies of scope Enlightened self interest Equilibrium output Excess capacity Experience curve External diseconomies of scale External economies of scale Exit cost First mover advantage Fixed cost Forward vertical integration Franchised monopoly Freemium Game Theory Herfindahl Index Hit-and-run competition Horizontal collusion Horizontal integration Hostile takeover Innovation Where it is cheaper to produce a range of products Acting in a way that is costly or inconvenient at present, but which is believed to be in one s best interest in the long term. E.g. firms accepting some short term costs (lower profits) in return for long-term gains. Relevant to game theory A monopolist is assumed to profit maximise i.e. an output equal to the point where MC=MR The difference between the current output of a business and the total amount it could produce in the current time period. Pattern of falling costs as production of a product or service increases, because the company learns more about it, workers become more skilful When the growth of an industry leads to higher costs for businesses that are part of that industry for example, increased traffic congestion When the expansion of an industry leads to the development of services which benefit suppliers in the industry causing a downward sloping industry supply curve. A business might benefit from external economies by locating in an area in which the industry is already established A barrier to exit the costs associated with a business halting production and leaving a market - linked to the concept of sunk costs A business first into the market can develop a competitive advantage through learning by doing - making it more difficult and costly for new firms to enter Business expense that does not vary directly with the level of output Acquiring a business higher in the supply chain e.g. a vehicle manufacturer buys a car parts distributor When the government grants a company the exclusive right to sell or manufacture a product or service in a particular area Business model in which some basic services are provided for free, with the aim of enticing users to pay for additional, premium features or content A game happens when there are two or more interacting decision-takers (players) and each decision or combination of decisions involves a particular outcome (known as a pay-off.) A measure of market concentration. The index is calculated by squaring the % market share of each firm in the market and summing these numbers When a business enters an industry to take advantage of temporarily high (supernormal) market profits. Common in highly contestable markets Where there is agreement between firms at the same stage of the production process to charge prices above the competitive level When companies from the same industry amalgamate to form a larger company - firms are at the same stage of the production process A takeover that is not supported by the management of the company being acquired - as opposed to a friendly takeover Making changes to something established. Invention, by contrast, is the act of coming upon or finding. Innovation is the creation of new intellectual assets
Innovation-diffusion Interdependence Internal growth Inventories Joint-venture Kinked demand curve Last mover advantage Light-touch regulation Limit pricing Marginal cost Marginal profit Marginal revenue Merger Merger integration Metcalfe s Law Minimum efficient scale Monopolistic competition Monopoly profit Monopsony The extent and pace at which a market adopts new products When the actions of one firm has an effect on its competitors in the market. Interdependence is a feature of an oligopoly. In simple terms - when two or more things depend on each other (i.e. business and society) Internal growth occurs when a business gets larger by increasing the scale of its own operations rather than relying on integration with other businesses Inventory is a list for goods and materials, or those goods and materials themselves, held available in stock by a business Agreement between two or more companies to cooperate on a particular project or a business that serves their mutual interests. The kinked demand curve model assumes that a business might face a dual demand curve for its product based on the likely reactions of other firms in the market to a change in its price or another variable The advantage a company gains by being one of the last to sell a product or provide a service, when technology has improved and costs are very low An approach of government to managing business behaviour - prefers to influence rather than legislate/regulate Carrot or stick? When a firm sets price low enough to discourage new entrants into the market The change in total costs from increasing output by one extra unit the formula for MC is change in total cost divided by change in quantity The increase in profit when one more unit is sold or the difference between MR and MC. If MR = 20 and MC = 14 then marginal profit = 6 The change in total revenue from selling one extra unit of output A merger is a combination of two previously separate organisations. The process of bringing two firms together once they have come under common ownership. Often regarded as the most difficult part of any takeover or merger. The integration process needs to cover hard areas such as IT systems and marketing strategy as well as soft issues such as different business cultures Coined by Robert Metcalfe, Metcalfe's law says that the usefulness of a network equals the square of the number of users. This is linked to the concept of network economies of scale Scale of production where internal economies of scale have been fully exploited. Corresponds to the lowest point on the long run average cost curve. A market structure characterized by many buyers and sellers of slightly different products and easy entry to, and exit from, the industry. Good examples include fast food outlets in towns and cities A firm is said to reap monopoly profits when a lack of viable market competition allows it to set its prices above the equilibrium price for a good or service without losing profits to competitors When a single buyer controls the market for a particular good or service, in essence setting price and quality levels, normally because without that buyer there would not sufficient demand for the product to survive
Moral Hazard Multinational Mutual interdependence Nash Equilibrium Nationalization Natural monopoly NGO Non-price competition Normal profit Oligopoly Optimal plant size Pareto efficiency Patent Paywall Peak pricing Penetration pricing Perfect competition Perfect price discrimination Predatory pricing When someone pays for your accidents and problems, you may be inclined to take less effort to avoid accidents and problems A company with subsidiaries or manufacturing bases in several countries The relationship between oligopolists, in which the actions of each business affect the other businesses In a Nash Equilibrium, the outcome of a game that occurs is when player A takes the best possible action given the action of player B, and player B takes the best possible action given the action of player A When a government takes over a private sector company For a natural monopoly the long-run average cost curve falls continuously over a large range of output. The result may be that there is only room in a market for one firm to fully exploit the economies of scale that are available Non-governmental organization (e.g. WWF, Greenpeace) Non-price competition assumes increased importance in oligopolistic markets. Competing not on the basis of price but by other means, such as the quality of the product, packaging, customer service, etc. Normal profit is the transfer earnings of the entrepreneur i.e. the minimum reward necessary to keep her in her present industry. Normal profit is therefore a fixed cost, included in the average, not the marginal, cost curve An oligopoly is a market dominated by a few producers, each of which has control over the market. However, oligopoly is best defined by the conduct (or behaviour) of firms within a market rather than its market structure Optimal plant is the size where costs are minimized, i.e. when all economies of scale have been obtained, but diseconomies have not set in. Sometimes the size of a firm or plant is also limited by the size of the market Where it is not possible for individuals, households, or firms to bargain or trade in such a way that everyone is at least as well off as they were before and at least one person is better off. Also known as an efficient outcome Right under law to produce and market a good for a specified period of time Blocking access to a website which is only available to paying subscribers When a business raises its prices at a time when demand has reached a peak might be justified due to the higher marginal costs of supply at peak times A pricing policy used to enter a new market, usually by setting a very low price Theoretical condition of a market where prices reflect complete mobility of resources and freedom of entry and exit, full access to information by all participants, relatively homogeneous products, and the fact that no one buyer or seller, or group of buyers or sellers, has any advantage over another. When a firm separates the whole market into each individual consumer and charges them the price they are willing and able to pay Setting an artificially low price for a product in order to drive away competition - deemed to be illegal by the UK and European competition authorities
Price capping Price ceiling Price discrimination Price fixing Price leadership Price regulation Prisoners dilemma Private equity Private Finance Initiative Privatization Procurement collusion Producer surplus Product differentiation Production function Productivity Profit Profit margin Profit maximization Profit per unit A government-imposed limit on the price charged for a product - otherwise known as price capping. Often introduced as a way of controlling the monopoly pricing power of businesses with a large amount of market power Law that sets or limits the price to be charged for a particular good When a firm charges a different price to different groups of consumers for an identical good or service, for reasons not associated with costs Price fixing represents an attempt by suppliers to control supply and fix price at a level close to the level we would expect from a monopoly When one firm has a clear dominant position in the market and the firms with lower market shares follow the pricing changes prompted by the dominant firm Government control of prices, normally for utilities and other essential services A problem in game theory that demonstrates why two people might not cooperate even if it is in both their best interests to do so. In the classic game, cooperating is dominated by defecting, so that the only possible equilibrium for the game is for all players to defect. No matter what the other player does, one player will always gain a greater payoff by playing defect. Injection of funds by specialized investors into private companies with the aim of achieving high rates of return The PFI is a means of obtaining private funds for public sector projects. PFI is when major infrastructure/buildings/project/large scale contracts are issued by governments to private firms The sale of state-owned companies to the private sector, normally through a stock market listing. The opposite of nationalization Where companies illegally bid for large contracts by rigging bids to decide which one of them gets the contract in advance. The difference between what producers are willing and able to supply a good for and the price they actually receive. The level of producer surplus is shown by the area above the supply curve and below the market price When a business seeks to distinguish what are essentially the same products from one another by real or illusory means. The assumption of homogeneous products under conditions of perfect competition no longer applies. The relationship between a firm s output and the quantities of factor inputs (labour, capital, land) that it employs How much is produced per unit of input. Labour productivity can be calculated per worker, per hour worked, etc. Capital productivity is similar to calculating a return from an investment The excess of revenue over expenses; or a positive return on an investment. The ratio of profit over revenue, expressed as a percentage. Mainly an indication of the ability of a company to control costs Profit maximization occurs when marginal cost = marginal revenue Profit per unit (or the profit margin) = AR ATC. In markets where demand is price inelastic, a business may be able to raise price well above average cost earning a higher profit margin on each unit sold. In more competitive markets, profit margins will be lower because demand is price elastic
Public utility Regulated industry Regulatory capture Rent seeking behaviour Revenue maximization Revenue synergies RPI-X Pricing Formula Satisficing Saturation Second degree price discrimination Shareholder return Short run Short-termism Shut down price Social enterprises Socially responsible investing Spare capacity Stakeholder Stakeholder conflict A company that provides public services, such as power, water and telecommunications. Regulated by government, not necessarily state-owned An industry that is closely controlled by the government When industries under the control of a regulatory body appear to operate in favour of the vested interest of monopoly producers rather than consumers Behaviour by producers in a market that improves the welfare of one but at the expense of another. A feature of monopoly and oligopoly Revenue maximization is an output when marginal revenue = zero (MR=0) The ability to sell more products and services or raise prices after a business merger e.g. marketing and selling complementary products; cross-selling into a new customer base and sharing distribution channels. This formula encourages efficiency within regulated businesses by taking the retail price index (i.e. the rate of inflation) as its benchmark for the allowed changes in prices and then subtracting X an efficiency factor from it. Satisficing involves the owners setting minimum acceptable levels of achievement in terms of revenue and profit. To offer so much for sale that there is more than people want to buy Businesses selling off packages of a product deemed to be surplus capacity at lower prices than the previously advertised price also volume discounts Total return (dividends + increases in business value) for shareholders A time period where at least one factor of production is in fixed supply. We normally assume that the quantity of plant and machinery is fixed and that production can be altered through changing labour, raw materials and energy When a business pursues the goal of maximizing short-term profits because of a fear of being taken-over or suffer a fall in their share price In the short run the firm will continue to produce as long as total revenue covers total variable costs or put another way, so long as price per unit > or equal to average variable cost (P>AVC) Businesses run on commercial lines with profits reinvested for social aims often said to be built on three pillars profit, people and planet Also known as ethical investing; shareholders pursuing investment strategies which seeks to maximize both financial return and social good Spare, surplus or excess capacity is the difference between current output (utilized capacity) and what can be produced at full capacity Any party that is committed, financially or otherwise, to a company and is therefore affected by its performance e.g. shareholders, employees, management, customers and suppliers. Their interests do not always coincide Stakeholder conflict occurs when different stakeholders have different objectives. Firms have to choose between maximizing one objective and satisfactorily meeting several stakeholder objectives, so called satisficing
Static efficiency Strategic behaviour Sub-normal profit Sunk costs Supernormal profit Synergy Tacit collusion Takeover Technical efficiency Total cost Total revenue Variable cost Vertical integration Welfare economics Whistle blowing X-inefficiency Zero-sum game Static efficiency focuses on how much output can be produced now from a given stock of resources, and whether producers are charging a price to consumers that reflects fairly the cost of the factors used to produce a product Decisions that take into account the market power and reactions of other firms Any profit less than normal profit where price < average cost Sunk costs cannot be recovered if a business decides to leave an industry. The existence of sunk costs makes a market less contestable. A firm earns supernormal profit when its profit is above that required to keep its resources in their present use in the long run i.e. when price > average cost When the whole is greater than the sum of the individual parts Where firms undertake actions that are likely to minimize a competitive response, e.g. avoiding price cutting or not attacking each other s market. Tacit collusions is when firms co-operate but not formally, e.g. price leadership, or quiet or implied co-operation, secret, unspoken cooperation Where one business acquires a controlling interest in another business. Takeovers are much more common than mergers. How well and quickly a machine produces goods. When measuring the technical efficiency of a machine, the production costs are not considered important Total cost = total fixed cost + total variable cost Total revenue (TR) is found by multiplying price (P) by output i.e. number of units sold. Total revenue is maximized when marginal revenue = zero Variable costs are business costs that vary directly with output since more variable inputs are required to increase output. Also known as prime costs Vertical Integration involves acquiring a business in the same industry but at different stages of the supply chain The study of how an economy can best allocate scarce resources to maximise the welfare of its citizens When one or more agents in a collusive agreement report it to the authorities A lack of real competition may give a monopolist less of an incentive to invest in new ideas or consider consumer welfare An economic transaction in which whatever is gained by one party must be lost by the other. In a zero sum game, the gain of one player is exactly offset by the loss of the other players. If one business gains market share, it must be at the expense of the other firms in the market