This document provides definitions for various business economics concepts. Some key points include: - Abnormal profit refers to profits above normal levels due to barriers to entry preventing competition. - Oligopoly is a market structure with a small number of producers where each considers the actions of others. - Economies of scale refer to lower long-run average costs from increased output, while diseconomies are higher costs from outputs beyond the optimal scale. - Barriers to entry protect incumbent firms by making entry difficult for new competitors.

1. Business Economics Glossary
Concept
Abnormal profit
Agency problem
Anti-competitive behaviour
Asymmetric information
Average cost
Average cost pricing
Average fixed cost
Average revenue
Average variable cost
Backward vertical
integration
Barriers to entry
Behavioural economics
Bi-lateral monopoly
Brand extension
Brand loyalty
Break-even output
Business ethics
Capacity
Capital intensive
Cartel
Collusion
Competition Commission
Competition Policy
Competitive advantage
Complex onopoly
Concentration ratio
Conglomerate merger
Consolidation
Constant returns
Consumer surplus
Consumption tax
Contestable market
Glossary Entry
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
Possible conflicts of interest that may result between the shareholders (principal) and the
management (agent) of a firm
Strategies designed to limit the degree of competition inside a market
Where different parties have unequal access to information in a market
Total cost per unit of output = Total cost / output = TC/Q
Setting prices close to average cost. It is a way to maximise sales, whilst maintaining normal
profits. It is sometimes known as sales maximization
Total fixed cost per unit of output = TFC/Q
Total revenue per unit of output
Total variable cost per unit of output = TVC/Q
Acquiring a business operating earlier in the supply chain – e.g. a retailer buys a wholesaler, a
brewer buys a hop farm
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
Research that adds elements of psychology to traditional models in an attempt to better
understand decision-making by investors, consumers and other economic participants
Where a monopsony buyer faces a monopsony seller in a market
Adding a new product to an existing branded group of products
The degree to which people regularly buy a particular brand and refuse to or are reluctant to
change to other brands
The break-even price is when price = average total cost (P=AC)
Business ethics is concerned with the social responsibility of management towards the firm’s
major stakeholders, the environment and society in general
The amount that can be produced by a plant, company, or economy (industrial capacity) over a
given period of time.
When an industry or production process requires a relatively large amount of capital (fixed
assets) or proportionately more capital than labour
An association of businesses or countries that collude to influence production levels and thus the
market price of a particular product
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
Body that conducts in-depth inquiries into mergers, markets and the regulation of the major
regulated industries such as water, electricity and gas
Policy which seeks to promote competition and efficiency in different markets and industries
When a company has an advantage over another in the provision of a particular product or
service
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
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.
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 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.
When long run average cost remains constant as output increases because output is rising in
proportion to the inputs used in the production process
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).
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
Where an entrant has access to all production techniques available to the incumbents is not

2. Cooperative outcome
Corporate governance
Corporate strategy
Cost synergies
Cost-plus pricing
Cost-reducing innovations
Countervailing power
Creative destruction
Credit Union
Cross-subsidy
Deadweight loss
De-layering
De-merger
Deregulation
Diseconomies of scale
(internal)
Dis-synergies
Diversification
Divorce between
ownership and control
Dominant market position
Dominant strategy
Due Diligence
Duopoly
Duopsony
Dynamic efficiency
Economic risk
Economies of scale
Economies of scope
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
An equilibrium in a game where the players agree to cooperate
Practices, principles and values that guide a firm and its activities
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 are the cost savings that a buyer aims to achieve as a result of taking over or
merging with another business
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 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
When the market power of a monopolistic/oligopolistic seller is offset by powerful buyers who
can prevent the price from being pushed up
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
Financial co-operatives owned and controlled by their members offering banking products
A cross subsidy uses profits from one line of business to finance losses in another line of business
e.g. Royal Mail and 2nd class letters
Loss in producer & consumer surplus due to an inefficient level of production
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
The hiving off of one or more business units from a group so that they can operate as
independently managed concerns
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
A business may expand beyond the optimal size in the long run and experience diseconomies of
scale. This leads to rising LRAC. For example, a firm increases all inputs by 300 %, its output
increases by 200%.
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
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.
The owners of a company normally elect a board of directors to control the business’s resources
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
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
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 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
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
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 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
The risk that a company may be disadvantaged by exchange rate movements or regulatory
changes in the country in which it is operating
Falling long run average cost as output increases in the long run
Where it is cheaper to produce a range of products

3. Enlightened self interest
Equilibrium output
Excess capacity
Experience curve
External diseconomies of
scale
External economies of
scale
First mover advantage
Fixed cost
Forward vertical
integration
Franchised monopoly
Freemium
Game Theory
Herfindahl Index
Hit-and-run competition
Horizontal collusion
Horizontal integration
Hostile takeover
Innovation
Innovation-diffusion
Interdependence
Internal growth
Inventories
Joint-venture
Kinked demand curve
Laissez-faire
Last mover advantage
Light-touch regulation
Limit pricing
Marginal cost
Marginal profit
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
A monopolist is assumed to profit maximise, in other words, aims to achieve an output equal to
the point where MC=MR
The difference between the current output of a business and the total amount it could produce in
the current time period.
Pattern of falling costs as production of a product or service increases, because the company
learns more about it, workers become more skilful
When the growth of an industry leads to higher costs for businesses that are part of that industry
– for example, increased traffic congestion
When the expansion of an industry leads to the development of ancillary services which benefit
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
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
Business expenses that do not vary directly with the level of output
Acquiring a business further up the supply chain – e.g. a vehicle manufacturer buys a car parts
distributor
When the government grants a company the exclusive right to sell or manufacture a product or
service in a particular area
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
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.)
A measure of market concentration. The index is calculated by squaring the % market share of
each firm in the market and summing these numbers.
When a business enters an industry to take advantage of temporarily high (supernormal) market
profits. Common in highly contestable markets.
Where there is agreement between firms at the same stage of the production process to charge
prices above the competitive level.
When companies from the same industry amalgamate to form a larger company - firms are at the
same stage of the production process
A takeover that is not supported by the management of the company being acquired - as
opposed to a friendly takeover
Making changes to something established. Invention, by contrast, is the act of coming upon or
finding. Innovation is the creation of new intellectual assets
The extent and pace at which a market adopts new products, or improved versions of existing
products
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 occurs when a business gets larger by increasing the scale of its own operations
rather than relying on integration with other businesses
Inventory is a list for goods and materials, or those goods and materials themselves, held
available in stock by a business
Agreement between two or more companies to cooperate on a particular project or a business
that serves their mutual interests.
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
A doctrine that a Government should not interfere with actions of business and markets
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
An approach of government to managing business behaviour - prefers to “influence” rather than
“legislate/regulate” Carrot or stick?
When a firm sets price low enough to discourage new entrants into the market
The change in total costs from increasing output by one extra unit
The increase in profit when one more unit is sold or the difference between MR and MC. If MR =
£20 and MC = £14 then marginal profit = £6

4. Marginal revenue
Merger
Merger integration
Metcalfe’s Law
Minimum efficient scale
Monopolistic competition
Monopoly profit
Monopsony
Moral Hazard
Multinational
Mutual interdependence
Nash Equilibrium
Nationalization
Natural monopoly
NGO
Non-price competition
Normal profit
Oligopoly
Optimal plant size
Pareto efficiency
Patent
Paywall
Peak pricing
Penetration pricing
Perfect competition
Perfect price discrimination
Predatory pricing
The change in total revenue from selling one extra unit of output
A merger is a combination of two previously separate organisations.
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
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
Scale of production where internal economies of scale have been fully exploited. Corresponds to
the lowest point on the long run average cost curve
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
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
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
When someone pays for your accidents and problems, you may be inclined to take less effort to
avoid accidents and problems
A company with subsidiaries or manufacturing bases in several countries
The relationship between oligopolists, in which the actions of each business affect the other
businesses
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
When a government takes over a private sector company
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
Non-governmental organization (e.g. WWF, Greenpeace)
Competing not on the basis of price but by other means, such as the quality of the product,
packaging, customer service, etc.
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
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 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
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.
Right under law to produce and market a good for a specified period of time
Blocking access to a website which is only available to paying subscribers
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
A pricing policy used to enter a new market, usually by setting a very low price
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.
When a firm separates the whole market into each individual consumer and charges them the
price they are willing and able to pay
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.

5. Price capping
Price ceiling
Price discrimination
Price fixing
Price leadership
Price regulation
Prisoners’ dilemma
Private equity
Private Finance Initiative
Privatization
Procurement collusion
Producer surplus
Product differentiation
Production function
Productivity
Profit
Profit margin
Profit maximization
Profit per unit
Public utility
Regulated industry
Regulatory capture
Rent seeking behaviour
Retained profit
Revenue maximization
Revenue synergies
RPI-X Pricing Formula
Satisficing
Saturation
Second degree price
discrimination
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
Law that sets or limits the price to be charged for a particular good
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 represents an attempt by suppliers to control supply and fix price at a level close to
the level we would expect from a monopoly
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
Government control of prices, normally for utilities and other essential services
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.
Injection of funds by specialized investors into private companies with the aim of achieving high
rates of return
The PFI is a means of obtaining private funds for public sector projects
The sale of state-owned companies to the private sector, normally through a stock market listing.
The opposite of nationalization
Where companies illegally bid for large contracts by rigging bids to decide which one of them gets
the contract in advance.
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
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.
The relationship between a firm’s output and the quantities of factor inputs (labour, capital, land)
that it employs
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
The excess of revenue over expenses; or a positive return on an investment.
The ratio of profit over revenue, expressed as a percentage. Mainly an indication of the ability of
a company to control costs
Profit maximization occurs when marginal cost = marginal revenue
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
A company that provides public services, such as power, water and telecommunications.
Regulated by government, not necessarily state-owned
An industry that is closely controlled by the government
When industries under the control of a regulatory body appear to operate in favour of the vested
interest of monopoly producers rather than consumers
Behaviour by producers in a market that improves the welfare of one but at the expense of
another. A feature of monopoly and oligopoly
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 is an output when marginal revenue = zero (MR=0)
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.
This formula encourages efficiency within regulated businesses by taking the retail price index
(i.e. the rate of inflation) as its benchmark for the allowed changes in prices and then subtracting
X – an efficiency factor – from it.
Satisficing involves the owners setting minimum acceptable levels of achievement in terms of
revenue and profit.
To offer so much for sale that there is more than people want to buy
Businesses selling off packages of a product deemed to be surplus capacity at lower prices than
the previously published/advertised price – also volume discounts

6. Shareholder return
Short run
Short-termism
Shut down price
Social enterprises
Social reporting
Socially responsible
investing
Spare capacity
Stakeholder
Stakeholder conflict
Static efficiency
Strategic behaviour
Sub-normal profit
Sunk costs
Supernormal profit
Synergy
Tacit collusion
Takeover
Technical efficiency
Total cost
Total revenue
Variable cost
Vertical integration
Welfare economics
Whistle blowing
X-inefficiency
Zero-sum game
Total return (dividends + increases in business value) for shareholders
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
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
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)
Businesses run on commercial lines with profits reinvested for social aims – often said to be built
on three pillars – profit, people and planet
Accounting for, and formally reporting the social & environmental impacts of a firms actions to all
relevant stakeholders
Also known as ethical investing; shareholders pursuing investment strategies which seeks to
maximize both financial return and social good
Spare, surplus or excess capacity is the difference between current output (utilized capacity) and
what can be produced at full capacity
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 occurs when different stakeholders have different objectives. Firms have to
choose between maximizing one objective and satisfactorily meeting several stakeholder
objectives, so called satisficing
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
Decisions that take into account the market power and reactions of other firms
Any profit less than normal profit
Sunk costs cannot be recovered if a business decides to leave an industry. The existence of sunk
costs makes a market less contestable.
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
When the whole is greater than the sum of the individual parts
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
Where one business acquires a controlling interest in another business. Takeovers are much
more common than mergers.
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 fixed cost + total variable cost
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 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 involves acquiring a business in the same industry but at different stages of
the supply chain
Study of how an economy can best allocate scarce resources to maximise welfare
When one or more agents in a collusive agreement report it to the authorities
A lack of real competition may give a monopolist less of an incentive to invest in new ideas or
consider consumer welfare
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