This document defines various economic terms related to business and markets. Some key terms include: - Abnormal profit refers to profit above normal levels, often due to barriers to entry in a monopolistic market. - Agency problem refers to potential conflicts between shareholders and management of a firm. - Economies of scale describe falling average costs as output increases due to efficiencies, while diseconomies of scale refer to rising costs from becoming too large. - Barriers to entry make it difficult for new competitors to enter a market and undermine a monopoly.

1. Tutor2u A2 Business Economics Glossary
Concept Glossary Entry
Abnormal profit 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
Agency problem Possible conflicts of interest that may result between the shareholders (principal) and the
management (agent) of a firm
Allocative efficiency Producing an output demanded by consumers at a price that reflects the marginal cost of supply
Anti-competitive
behaviour
Strategies designed to limit the degree of competition inside a market and reinforce the
monopoly power of established businesses
Asymmetric
information
Where different parties have unequal access to information in a market
Average cost Total cost per unit of output = Total cost / output = TC/Q
Average cost pricing Setting prices close to average cost. It is a way to maximise sales, whilst maintaining normal
profits. It is sometimes known as sales maximization
Average fixed cost
(AFC)
Total fixed cost per unit of output = TFC/Q
Average revenue
(AR)
Total revenue per unit of output = Price/Output
Average variable cost Total variable cost per unit of output = TVC/Q
Backward vertical
integration
Acquiring a business operating earlier in the supply chain – e.g. a retailer buys a wholesaler, a
brewer buys a hop farm
Barriers to entry 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
Behavioural
economics
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
Bi-lateral monopoly Where a monopsony buyer faces a monopsony seller in a market
Brand extension Adding a new product to an existing branded group of products
Brand loyalty The degree to which people regularly buy a particular brand and refuse to or are reluctant to
change to other brands
Break-even output The break-even price is when price = average total cost (P=AC)
Business ethics Business ethics is concerned with the social responsibility of management towards the firm’s
major stakeholders, the environment and society in general
Capacity The amount that can be produced by a plant or business over a given period of time.
Capital intensive When an industry or production process requires a relatively large amount of capital (fixed
assets) or proportionately more capital than labour

2. Cartel An association of businesses or countries that collude to influence production levels and thus
the market price of a particular product
Collusion 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
Competition and
Markets Authority
(CMA)
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
Competition Policy Policy which seeks to promote competition and efficiency in different markets and industries
Complex monopoly 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
Concentration ratio 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.
Conglomerate merger 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 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.
Constant returns When long run average cost remains constant as output increases because output is rising in
proportion to the inputs used in the production process
Consumer surplus 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).
Consumption tax 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
Contestable market 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
Cooperative outcome An equilibrium in a game where the players agree to cooperate
Corporate strategy 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 Cost synergies are the cost savings that a buyer aims to achieve as a result of taking over or
merging with another business
Cost-plus pricing 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
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
Countervailing power When the market power of a monopolistic/oligopolistic seller is offset by powerful buyers who
can prevent the price from being pushed up

3. Creative destruction 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
Credit Union Financial co-operatives owned & controlled by members offering banking products
Cross-subsidy 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
Deadweight loss Loss in producer & consumer surplus due to an inefficient level of production
De-layering 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
De-merger The hiving off of one or more business units from a group so that they can operate as
independently managed concerns
Deregulation Opening up of markets by reducing barriers to entry. The aim is to increase supply, competition
and innovation and bring lower prices for consumers
Diminishing returns Addition of a variable factor to a fixed factor results in a fall in marginal product
Diseconomies of
scale (internal)
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)
Dis-synergies 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
Diversification Increasing the range of products or markets served by a business
Divorce between
ownership and
control
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
Dominant market
position
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
Dominant strategy 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 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
Duopoly Any market that is dominated by two suppliers
Duopsony 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 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
Economic risk The risk that a company may be disadvantaged by exchange rate movements or regulatory
changes in the country in which it is operating
Economies of scale Falling long run average cost as output increases in the long run

4. Economies of scope Where it is cheaper to produce a range of products
Enlightened self
interest
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
Equilibrium output A monopolist is assumed to profit maximise i.e. an output equal to the point where MC=MR
Excess capacity The difference between the current output of a business and the total amount it could produce
in the current time period.
Experience curve Pattern of falling costs as production of a product or service increases, because the company
learns more about it, workers become more skilful
External
diseconomies of
scale
When the growth of an industry leads to higher costs for businesses that are part of that
industry – for example, increased traffic congestion
External economies
of scale
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
Exit cost A barrier to exit – the costs associated with a business halting production and leaving a market
- linked to the concept of sunk costs
First mover
advantage
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
Fixed cost Business expense that does not vary directly with the level of output
Forward vertical
integration
Acquiring a business higher in the supply chain – e.g. a vehicle manufacturer buys a car parts
distributor
Franchised monopoly When the government grants a company the exclusive right to sell or manufacture a product or
service in a particular area
Freemium 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
Game Theory 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.)
Herfindahl Index A measure of market concentration. The index is calculated by squaring the % market share of
each firm in the market and summing these numbers
Hit-and-run
competition
When a business enters an industry to take advantage of temporarily high (supernormal) market
profits. Common in highly contestable markets
Horizontal collusion Where there is agreement between firms at the same stage of the production process to charge
prices above the competitive level
Horizontal integration When companies from the same industry amalgamate to form a larger company - firms are at
the same stage of the production process
Hostile takeover A takeover that is not supported by the management of the company being acquired - as
opposed to a friendly takeover
Innovation Making changes to something established. Invention, by contrast, is the act of coming upon or
finding. Innovation is the creation of new intellectual assets

5. Innovation-diffusion The extent and pace at which a market adopts new products
Interdependence 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 Internal growth occurs when a business gets larger by increasing the scale of its own operations
rather than relying on integration with other businesses
Inventories Inventory is a list for goods and materials, or those goods and materials themselves, held
available in stock by a business
Joint-venture Agreement between two or more companies to cooperate on a particular project or a business
that serves their mutual interests.
Kinked demand curve 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
Last mover
advantage
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
Light-touch
regulation
An approach of government to managing business behaviour - prefers to “influence” rather than
“legislate/regulate” Carrot or stick?
Limit pricing When a firm sets price low enough to discourage new entrants into the market
Marginal cost 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
Marginal profit 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
Marginal revenue The change in total revenue from selling one extra unit of output
Merger A merger is a combination of two previously separate organisations.
Merger integration 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
Metcalfe’s Law 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
Minimum efficient
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.
Monopolistic
competition
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
Monopoly profit 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
Monopsony 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

6. Moral Hazard When someone pays for your accidents and problems, you may be inclined to take less effort to
avoid accidents and problems
Multinational A company with subsidiaries or manufacturing bases in several countries
Mutual
interdependence
The relationship between oligopolists, in which the actions of each business affect the other
businesses
Nash Equilibrium 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
Nationalization When a government takes over a private sector company
Natural monopoly 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
NGO Non-governmental organization (e.g. WWF, Greenpeace)
Non-price
competition
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 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
Oligopoly 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 size 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
Pareto efficiency 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
Patent Right under law to produce and market a good for a specified period of time
Paywall Blocking access to a website which is only available to paying subscribers
Peak pricing 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
Penetration pricing A pricing policy used to enter a new market, usually by setting a very low price
Perfect competition 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.
Perfect price
discrimination
When a firm separates the whole market into each individual consumer and charges them the
price they are willing and able to pay
Predatory pricing 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

7. Price capping 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
Price ceiling Law that sets or limits the price to be charged for a particular good
Price discrimination 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 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
Price leadership 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
Price regulation Government control of prices, normally for utilities and other essential services
Prisoners’ dilemma 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.
Private equity Injection of funds by specialized investors into private companies with the aim of achieving high
rates of return
Private Finance
Initiative
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
Privatization The sale of state-owned companies to the private sector, normally through a stock market
listing. The opposite of nationalization
Procurement
collusion
Where companies illegally bid for large contracts by rigging bids to decide which one of them
gets the contract in advance.
Producer surplus 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
Product
differentiation
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.
Production function The relationship between a firm’s output and the quantities of factor inputs (labour, capital, land)
that it employs
Productivity 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
Profit The excess of revenue over expenses; or a positive return on an investment.
Profit margin The ratio of profit over revenue, expressed as a percentage. Mainly an indication of the ability of
a company to control costs
Profit maximization Profit maximization occurs when marginal cost = marginal revenue
Profit per unit 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

8. Public utility A company that provides public services, such as power, water and telecommunications.
Regulated by government, not necessarily state-owned
Regulated industry An industry that is closely controlled by the government
Regulatory capture When industries under the control of a regulatory body appear to operate in favour of the vested
interest of monopoly producers rather than consumers
Rent seeking
behaviour
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
Revenue maximization is an output when marginal revenue = zero (MR=0)
Revenue synergies 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.
RPI-X Pricing
Formula
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 Satisficing involves the owners setting minimum acceptable levels of achievement in terms of
revenue and profit.
Saturation To offer so much for sale that there is more than people want to buy
Second degree price
discrimination
Businesses selling off packages of a product deemed to be surplus capacity at lower prices
than the previously advertised price – also volume discounts
Shareholder return Total return (dividends + increases in business value) for shareholders
Short run 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
Short-termism 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
Shut down 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)
Social enterprises Businesses run on commercial lines with profits reinvested for social aims – often said to be
built on three pillars – profit, people and planet
Socially responsible
investing
Also known as ethical investing; shareholders pursuing investment strategies which seeks to
maximize both financial return and social good
Spare capacity Spare, surplus or excess capacity is the difference between current output (utilized capacity)
and what can be produced at full capacity
Stakeholder 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 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

9. Static efficiency 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
Strategic behaviour Decisions that take into account the market power and reactions of other firms
Sub-normal profit Any profit less than normal profit – where price < average cost
Sunk costs Sunk costs cannot be recovered if a business decides to leave an industry. The existence of
sunk costs makes a market less contestable.
Supernormal profit 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
Synergy When the whole is greater than the sum of the individual parts
Tacit collusion 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
Takeover Where one business acquires a controlling interest in another business. Takeovers are much
more common than mergers.
Technical efficiency 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 cost = total fixed cost + total variable cost
Total revenue 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 cost 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 Vertical Integration involves acquiring a business in the same industry but at different stages of
the supply chain
Welfare economics The study of how an economy can best allocate scarce resources to maximise the welfare of its
citizens
Whistle blowing When one or more agents in a collusive agreement report it to the authorities
X-inefficiency A lack of real competition may give a monopolist less of an incentive to invest in new ideas or
consider consumer welfare
Zero-sum game 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