Business economics glossary for Unit 3 economics (EdExcel)

1. 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
Anti-competitive behaviour Strategies designed to limit the degree of competition inside a market
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 Total fixed cost per unit of output = TFC/Q
Average revenue Total revenue per unit of output
Average variable cost Total variable cost per unit of output = TVC/Q
Backward vertical Acquiring a business operating earlier in the supply chain – e.g. a retailer buys a wholesaler, a
integration 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
Behavioural economics 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, company, or economy (industrial capacity) 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
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 Commission Body that conducts in-depth inquiries into mergers, markets and the regulation of the major
regulated industries such as water, electricity and gas
Competition Policy Policy which seeks to promote competition and efficiency in different markets and industries
Competitive advantage When a company has an advantage over another in the provision of a particular product or
service
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 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

2. 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. The crucial assumption for contestability 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 governance Practices, principles and values that guide a firm and its activities
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 have the effect of causing an outward shift in market 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
Creative destruction First introduced by the Austrian School economist 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 and controlled by their members offering banking products
Cross-subsidy A cross subsidy uses profits from one line of business to finance losses in another line of business
nd
e.g. Royal Mail and 2 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 The opening up of markets to competition by reducing statutory barriers to entry. The aim is to
increase market supply, stimulate competition and innovation and drive prices down for final
consumers
Diseconomies of scale A business may expand beyond the optimal size in the long run and experience diseconomies of
(internal) scale. This leads to rising LRAC. For example, a firm increases all inputs by 300 %, its output
increases by 200%.
Dis-synergies Dis-synergies are negative or adverse effects of a takeover or merger. These are the 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. The extent of diversification
depends on the extent to which those products or markets are different from the existing
products and markets served by the business.
Divorce between The owners of a company normally elect a board of directors to control the business’s resources
ownership and control 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. Proctor & Gamble and Unilever took 84 per cent
of the UK market liquidi detergent sales in 2005
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

3. 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 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
Equilibrium output A monopolist is assumed to profit maximise, in other words, aims to achieve 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 When the growth of an industry leads to higher costs for businesses that are part of that industry
scale – for example, increased traffic congestion
External economies of When the expansion of an industry leads to the development of ancillary services which benefit
scale 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
First mover advantage The idea that a business that creates a new product and which is first into the market can
develop a competitive advantage perhaps through learning by doing - making it more difficult
and costly for new firms to come in
Fixed cost Business expenses that do not vary directly with the level of output
Forward vertical Acquiring a business further up the supply chain – e.g. a vehicle manufacturer buys a car parts
integration 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
Innovation-diffusion The extent and pace at which a market adopts new products, or improved versions of existing
products
Interdependence When the actions of one firm has an effect on competitors. 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
Laissez-faire A doctrine that a Government should not interfere with actions of business and markets
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
Marginal profit The increase in profit when one more unit is sold or the difference between MR and MC. If MR =

4. £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 Competition between companies whose products are similar but sufficiently differentiated to
allow each to benefit from monopoly pricing. A market structure characterized by many buyers
and sellers of slightly different products and easy entry to, and exit from, the industry. Firms have
differentiated products and therefore the demand is not perfectly elastic
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
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 An idea in game theory - any situation where all of the participants in a game are pursuing their
best possible strategy given the strategies of all of the other participants. 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 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.
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 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

5. 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. When predatory pricing is happening it is
likely than Price <Average Cost in the short run, but in the long run there will be a rise in prices as
competition is reduced.
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 strictly 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
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. 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, for instance, 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
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
Retained profit Profit retained by a business for its own use and which is not paid back to the company’s
shareholders or paid in taxation to the government
Revenue maximization Revenue maximization is an output when marginal revenue = zero (MR=0)
Revenue synergies The ability to sell more or raise prices after a merger e.g. marketing and selling complementary
products; cross-selling into a new customer base and sharing distribution channels.
RPI-X Pricing Formula This encourages efficiency within regulated businesses by taking the retail price index as a
benchmark for the 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.

6. Saturation To offer so much for sale that there is more than people want to buy
Second degree price Businesses selling off packages of a product deemed to be surplus capacity at lower prices than
discrimination the previously published/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 having the stock market mark down the value of the company. Short-termism may
make it difficult for a business to follow longer-term objectives
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
Social reporting Accounting for, and formally reporting the social & environmental impacts of a firms actions to all
relevant stakeholders
Socially responsible Also known as ethical investing; shareholders pursuing investment strategies which seeks to
investing 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. This would normally include 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
Static efficiency How much output can be produced now from given resources, and whether producers charge 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
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. 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 high quality 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 Study of how an economy can best allocate scarce resources to maximise welfare
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