Key terms 3.1 - 3.3 Flashcards
Define Firm
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
Define Private sector
The private sector is the part of the economy run by individuals & companies for profit and it is not state - controlled
Define Public Sector
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.
Define Not-for-profit organisations
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
Define Principal-agent problem
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.
Define Organic growth/ internal expansion
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
Define External Expansion
External expansion is growth achieved by acquiring another business.
Define Horizontal Integration
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.
Define Vertical Backward Integration
Backward vertical integration occurs when a firm integrates with a firm closer to the producer. This involves gaining control of suppliers.
Define vertical forward integration
Forward vertical integration occurs when the firm integrates with another firm closer to the consumer. This involves taking over a distributor.
Define Lateral Integration
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.
Define Conglomerate integration
Conglomerate integration refers to the process of merging or acquiring companies that operate in different industries or markets.
Define mergers
A merger is where two or more firms join under common ownership
Define demergers
A demerger is when a large firm is separated into multiple smaller firms.
Define take-over
A takeover is a process where one company (the acquirer) makes a successful bid to take control of or buy another one (the target).
Define profit maximising output condition
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.
Define Revenue maximisation
Total revenue is maximised when marginal revenue = zero
Define sales max.
Sales maximisation involves supplying the largest output possible consistent with earning at least normal profits where average revenue = average cost (AR=AC)
Define Profit satisficing
A firm is profit satisficing when it is earning just enough profits to keep its shareholders happy
Define variable factors
Variable factors are the factors of production which vary with the level of output
Define Fixed factors
Fixed factors are those that cannot be increased or decreased in the short run.
Define Short run
Short run is the period of time when at least one factor of production is fixed and cannot be changed.
Define Long run
All factors of production are variable
Define Total product
This is how much it costs to produce a given level of output
Define Average product
Average product is the average amount of output (product) a company produces for every input unit
Define Marginal product
The marginal product of labour is the additional output each unit of labour can produce
Define Law of Diminishing Marginal Returns
The law of diminishing marginal returns states that adding an additional factor of production results in smaller increases in output.
Define Marginal Revenue
This is the extra revenue a firm earns from the sale of one extra unit.
Define Marginal Cost
Marginal cost is the change in total costs resulting from increasing output by one unit
Define Variable cost
Variable costs are costs that vary in proportion to the volume of goods or services produced
Define Fixed costs
These are costs that DO NOT vary with the level of output
Define total cost
This is how much it costs to produce a given level of output
Define Average Variable cost
Average variable cost is variable cost divided by total output at each level of output.
Define average cost
Average cost measures cost per produced unit
Define Internal Economies of Scale
These occur when a firm becomes larger. Average costs of production fall as output increases
Define External economies of scale
External economies of scale refer to cost advantages that a firm can receive due to external factors, rather than factors internal to the firm.
Define Financial EoS
Refer tot he cost advantages that large companies or organisations achieve due to their size
Define Management EoS
Occurs when large firms can employ specialist managers who are skilled and efficient at certain tasks, this efficiency lowers the AC.
Define Purchasing EoS
Occurs when large firms buy raw materials or components in greater volumes & receive a bulk purchase discount, which lowers the AC
Define Technical EoS
These occur when a firm can produce goods or services more efficiently as it increases its scale of production
Define Constant Return to Scale
Output increases in proportion to input
Define Optimum Scale
MC=MB
Define Minimum efficient scale
The lowest of output at which a firm can achieve the minimum average cost of production
Define Profit
Profit is the difference between total revenue and total cost
Define Supernormal profit/abnormal profit
The profit above normal profit
Define Normal Profit
The minimum reward required to keep entrepreneurs supply their enterprise
Define Shut down condition
