Business Terms Flashcards
Opportunity Costs
The loss of potential gain from other alternatives when one alternative is chosen.
“idle cash balances represent an opportunity cost in terms of lost interest”
Profit Center
A part of an organization with assignable revenues and costs and hence ascertainable profitability.
Incremental costs
The incremental cost is also referred to as the differential cost. The incremental cost is the relevant cost for making a short run decision between two alternatives.
An incremental cost is an increase in total costs resulting from an increase in production or other activity.
For instance, if a company’s total costs increase from $320,000 to $360,000 as the result of increasing its machine hours from 8,000 to 10,000, the incremental cost of the 2,000 machine hours is $40,000.
Dead Cat Bounce
A term used by traders to describe a pattern wherein a spectacular decline in share prices is immediately followed by a moderate and temporary rise before resuming its downward movement.
Black Swan
Black swan events are typically random and unexpected. Markets tend to work on the basis that black swans either don’t exist or appear with such irregularity that they are not worth worrying about.
Diminishing Returns
The economic concept that each consecutive unit of good consumed, or resource used, is less useful or productive than the preceding one.
In a factory with three machines but no workers, each additional worker dramatically increases the output of the factory by working the machines.
The fourth worker, however, may just make tea for the first three. His impact on output will not be as dramatic as any of the first three, even if they are inspired to work harder by a good brew.
Externalities
Costs or benefits that affect society but are not included in the market price of a good or service.
Pollution is an example of a negative externality.
Education is an example of an externality benefit when members of society other than students benefit from a better-educated population.
Keynesian Economics
Named after the British economist, John Maynard Keynes, whose central insight was that changes in government income and spending are the most effective instrument of government economic policy.
Keynesians argue for active government intervention to manage the level of aggregate demand to achieve full employment.
Old Lady of Threadneedle Street
A name for the Bank of England dating back to the 18th century.
The Bank is on Threadneedle Street in the City of London.
The phrase Old Lady of Threadneedle Street first appeared in print, according to the Bank of England museum, in the headline to a cartoon which shows the prime minister of the day, William Pitt the Younger, pretending to woo the Bank, represented by an elderly lady wearing a dress of pound notes.
Lloyd’s of London
The London-based insurance market, which began in a coffee shop in Tower Street in the City in 1689, takes its name from Edward Lloyd, who owned the shop and apparently made strong coffee.
Members of Lloyd’s of London provide the supporting capital on which the market is built.
Corporate members include investment institutions and international insurance companies.
About 2,500 wealthy individual members known as “names” also use their own money to back the insurance market.
Mutual
A company owned by its members or depositors.
Poison Pill
A provision made by a company to deter takeover bids.
The tactic works by making sure a successful bid triggers some event which substantially reduces the value of the company.
Quantitative Easing
Quantitative easing is what non-economists call ‘turning on the printing press’.
In extreme circumstances, governments flood the financial system with money, easing pressure on banks by giving them extra capital.
Random Walk Theory
The theory that prices on stock markets do not follow a pattern because they do not take account of past movements in price.
This theory contradicts the work of chartists, who analyse past patterns of movement of prices to predict present and future prices.
Adam Smith
Considered the founding father of economics, Adam Smith wrote The Wealth of Nations, published in 1776.
His most famous concept was that markets guide economic activity and act like an “invisible hand” - allocating resources through prices, which rise when there is a shortage of a commodity and fall when it is plentiful.
