Key terms 3.1 - 3.3

Question 1

Define Firm

Answer 1

A firm is a business organisation such as corporation that produces and sells goods and services with an aim of generating revenue and making a profit

Question 2

Define Private sector

Answer 2

The private sector is the part of the economy run by individuals & companies for profit and it is not state - controlled

Question 3

Define Public Sector

Answer 3

The public sector includes organisations that are owned / controlled by central or local government. It includes the NHS, state-schools, the Police, HM forces and the civil service.

Question 4

Define Not-for-profit organisations

Answer 4

A not-for-profit organisation has a goal which aims to maximise social welfare. They can make profits, but they cannot be used for anything apart from this goal and the operation of the organisation

Question 5

Define Principal-agent problem

Answer 5

The principal-agent problem is a conflict in priorities between the owner of an asset and the person to whom control of the asset has been delegated.

Question 6

Define Organic growth/ internal expansion

Answer 6

This is when firms grow by expanding their production through increasing output, widening their customer base, by developing a new product or by diversifying their range

Question 7

Define External Expansion

Answer 7

External expansion is growth achieved by acquiring another business.

Question 8

Define Horizontal Integration

Answer 8

This is the merger of two firms in the same industry and the same stage of production. For example, if a car manufacturer merges with another car manufacturer, they will have horizontally integrated.

Question 9

Define Vertical Backward Integration

Answer 9

Backward vertical integration occurs when a firm integrates with a firm closer to the producer. This involves gaining control of suppliers.

Question 10

Define vertical forward integration

Answer 10

Forward vertical integration occurs when the firm integrates with another firm closer to the consumer. This involves taking over a distributor.

Question 11

Define Lateral Integration

Answer 11

When a company expands by merging with or acquiring another company that operates at the same level in the supply chain or industry, typically as a competitor.

Question 12

Define Conglomerate integration

Answer 12

Conglomerate integration refers to the process of merging or acquiring companies that operate in different industries or markets.

Question 13

Define mergers

Answer 13

A merger is where two or more firms join under common ownership

Question 14

Define demergers

Answer 14

A demerger is when a large firm is separated into multiple smaller firms.

Question 15

Define take-over

Answer 15

A takeover is a process where one company (the acquirer) makes a successful bid to take control of or buy another one (the target).

Question 16

Define profit maximising output condition

Answer 16

Profit maximisation occurs when marginal cost = marginal revenue (MC = MR). This is so that each extra unit produced gives no extra loss or no extra revenue.

Question 17

Define Revenue maximisation

Answer 17

Total revenue is maximised when marginal revenue = zero

Question 18

Define sales max.

Answer 18

Sales maximisation involves supplying the largest output possible consistent with earning at least normal profits where average revenue = average cost (AR=AC)

Question 19

Define Profit satisficing

Answer 19

A firm is profit satisficing when it is earning just enough profits to keep its shareholders happy

Question 20

Define variable factors

Answer 20

Variable factors are the factors of production which vary with the level of output

Question 21

Define Fixed factors

Answer 21

Fixed factors are those that cannot be increased or decreased in the short run.

Question 22

Define Short run

Answer 22

Short run is the period of time when ​at least one factor of production is fixed and cannot be changed.

Question 23

Define Long run

Answer 23

All factors of production are variable​

Question 24

Define Total product

Answer 24

This is how much it costs to produce a given level of output

Question 25

Define Average product

Answer 25

Average product is the average amount of output (product) a company produces for every input unit

Question 26

Define Marginal product

Answer 26

The marginal product of labour is the additional output each unit of labour can produce

Question 27

Define Law of Diminishing Marginal Returns

Answer 27

The law of diminishing marginal returns states that adding an additional factor of production results in smaller increases in output.

Question 28

Define Marginal Revenue

Answer 28

This is the extra revenue a firm earns from the sale of one extra unit.

Question 29

Define Marginal Cost

Answer 29

Marginal cost is the change in total costs resulting from increasing output by one unit

Question 30

Define Variable cost

Answer 30

Variable costs are costs that vary in proportion to the volume of goods or services produced

Question 31

Define Fixed costs

Answer 31

These are costs that DO NOT vary with the level of output

Question 32

Define total cost

Answer 32

This is how much it costs to produce a given level of output

Question 33

Define Average Variable cost

Answer 33

Average variable cost is variable cost divided by total output at each level of output.

Question 33

Define average cost

Answer 33

Average cost measures cost per produced unit

Question 34

Define Internal Economies of Scale

Answer 34

These occur when a firm becomes larger. Average costs of production fall as output increases

Question 35

Define External economies of scale

Answer 35

External economies of scale refer to cost advantages that a firm can receive due to external factors, rather than factors internal to the firm.

Question 36

Define Financial EoS

Answer 36

Refer tot he cost advantages that large companies or organisations achieve due to their size

Question 37

Define Management EoS

Answer 37

Occurs when large firms can employ specialist managers who are skilled and efficient at certain tasks, this efficiency lowers the AC.

Question 38

Define Purchasing EoS

Answer 38

Occurs when large firms buy raw materials or components in greater volumes & receive a bulk purchase discount, which lowers the AC

Question 39

Define Technical EoS

Answer 39

These occur when a firm can produce goods or services more efficiently as it increases its scale of production

Question 40

Define Constant Return to Scale

Answer 40

Output increases in proportion to input

Question 41

Define Optimum Scale

Answer 41

MC=MB

Question 42

Define Minimum efficient scale

Answer 42

The lowest of output at which a firm can achieve the minimum average cost of production

Question 43

Define Profit

Answer 43

Profit is the difference between total revenue and total cost

Question 44

Define Supernormal profit/abnormal profit

Answer 44

The profit above normal profit

Question 45

Define Normal Profit

Answer 45

The minimum reward required to keep entrepreneurs supply their enterprise

Question 46

Define Shut down condition