Definitions

Question 0

Define agency problem.

Answer 0

Possible conflicts of interest that may result between the shareholders (principal) and the management (agent) of a firm.

Question 1

Define abnormal profit.

Answer 1

Profit in excess of normal profit.

Also known as supernormal profit or monopoly profit. Abnormal profits may be obtained in a monopolistic market in the long run because of barriers to entry.

Question 2

Define allocative efficiency.

Answer 2

Producing goods and services demanded by consumers at a price that reflects the marginal cost of supply.

Question 3

Define Anti-competitive behaviour.

Answer 3

Strategies designed to limit the degree of competition inside a market and reinforce the monopoly power of established businesses.

Question 4

Define asymmetric information.

Answer 4

Where different parties have unequal access to information in a market.

Question 5

Define average cost.

Answer 5

Total cost per unit of output = Total cost / Output = Total cost / Quantity produced

Question 6

Define average cost pricing.

Answer 6

Setting prices close to average cost. It is a way to maximise sales, whilst maintaining normal profits. It is sometimes known as sales maximisation.

Question 7

Define average fixed cost (AFC).

Answer 7

Total fixed cost per unit of output = TFC / Q.

Question 8

Define average revenue (AR).

Answer 8

Total revenue per unit of output = Price / Output.

Question 9

Define variable cost.

Answer 9

Total variable cost per unit of output = TVC / Q.

Question 10

Define backward vertical integration.

Answer 10

Acquiring a business operating earlier in the supply chain - e.g. A retailer buys a wholesaler, a brewer buys a hop farm.

Question 11

Define barriers to entry.

Answer 11

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.

Question 12

Define behavioural economics.

Answer 12

Branch of economic research that adds elements of psychology to traditional models in an attempt to better understand decision - making by investors, consumers and other economic participants.

Question 13

Define bi-lateral monopoly.

Answer 13

Where a monopsony buyer faces a monopsony seller in a market.

Question 14

Define brand extension.

Answer 14

Adding a new product to an existing branded group of products.

Question 15

Define brand loyalty.

Answer 15

The degree to which people regularly buy a particular brand and refuse to, or are, reluctant to change to other brands.

Question 16

Define break-even output.

Answer 16

The break-even price is when price = average total cost. (P = AC).

Question 17

Define business ethics.

Answer 17

Business ethics is concerned with the social responsibility of management towards the firms major stakeholders, the environment and society in general.

Question 18

Define capacity.

Answer 18

The amount that can be produced by a plant, company, or economy (industrial capacity) over a given period of time.

Question 19

Define capital intensive.

Answer 19

When an industry or production process requires a relatively large amount of capital (fixed assets) or proportionately more capital than labour.

Question 20

Define cartel.

Answer 20

An association of business or countries that collude to influence production levels and thus the marrest price of particular product.

Question 21

Define churn rate.

Answer 21

The rate at which a company loses customers for a product or service that depends on repeat sales or regular customer usage.

Question 22

Define collusion.

Answer 22

Collusion takes 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.

Question 23

Define competition and markets authority (CMA).

Answer 23

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.