KEYWORDS

• Opportunity Cost


  the next best alternative that is forgone when making a decision
• Profit Maximisation


  objective of most firms: to generate as much profit as possible by choosing a certain quantity of output and price.
• Satisficing


  some firms may generate the minimum level of profit that their shareholders accept – perhaps just above normal profits –

  instead of trying to maximise profits.
• Marginal Revenue


  The additional revenue gained by a firm from selling one more unit of output.
• Stakeholder


  A person or group that has interest in, and/or is affected by, the operations of a business.
• Factors of production

  Inputs used to produce goods and services: land, labour, raw materials and capital
• Add value

  Value added is calculated as:

  Selling price of product/service – Total cost to create product/service.
• Specialisation

  When a factor of production (such as labour) is devoted to a single job with the overall effect being an increase in efficiency.
• Division of Labour


  When the productive process is split so each individual stage is carried out by different workers. This can improve the speed and efficiency of overall production.
• Direct tax


  A tax that is paid directly by the individual or organisation to the government. It cannot be avoided or shifted to another person or organisation.
• Indirect tax


  Tax that is collected by an intermediary between the consumer and the government. These sorts of taxes can be avoided through consumption choice.
• Inflation


  An increase in the price level of goods and services over a period of time.
• Unemployment

  The percentage of people in an economy who are economically active but not in employment.
• Rationing

  A function of price, as a resource becomes scarce then its price increases, reducing demand for it.
• Incentive

  A function of price, as a resource increases in price, suppliers are motivated to produce more goods as this will earn them higher revenue.
• Signaling

  A function of price, the idea that price sends messages to consumers and producers over whether or not to enter a market. Falling prices will prompt consumers to enter a market; rising prices will prompt producers to enter a market.
• Niche Market

  A market in which firms target smaller consumer groups and sell small quantities – but at a higher price. In order to achieve this, businesses focus on factors such as brand loyalty and high-quality goods.
• Mass Market

  A market in which many firms sell many goods. Prices are likely to be lower than in niche markets – but quality may also be lower. Customers will happily switch between producers.
• Dividend

  money that shareholders receive after all the expenses of a business have been paid.
• Shareholder

  A partial owner of a company. Shareholders invest money into a company in return for a stake in its success.
• Grant

  Cash that is given to a business. Unlike with loans, companies do not have to pay grants back.
• Share

  Partial ownership of a company. If, for example, a company splits into 100 shares and one person owns 10 shares, they own 10 per cent of the company.
• Stock Market

  A place where company shares are bought and sold. Examples include the New York and London stock exchanges.
• Float

  When a company decides to trade its shares on the stock market.
• Liquidation

  A company’s assets are no longer enough to pay the debts and so it is forced to close. The company will then sell off its assets in order to pay what debts it can.
• Secured loan


  A loan issued by a bank with some sort of asset (property, for example) listed as collateral.

  This asset can be claimed by the issuer of the loan if the debtor defaults. A secured loan will have lower borrowing costs (interest rate) than an unsecured loan.
• Collateral


  An asset that is promised to be handed over to a lender if the borrower cannot afford to repay a loan.
• Externality

  A cost or a benefit that is not captured by the market – they affect parties that are not involved in the transaction.
• Market Failure

  When a good or service is underconsumed because the market for it does not exist. For

  example, there is no market for street lighting because it would be impossible for firms to

  monetise the service.
• Subsidy

  Money paid by the government to boost the production of a good or service – perhaps to correct the underprovision of a good by the market.
• Government Failure

  This occurs when resources are allocated inefficiently following government intervention.
• Market Failure (2)

  This occurs when the market does not allocate resources efficiently. This can mean that social costs exceed social benefits and there is a net cost to society.
• Information Gap

  A difference between public perception of the costs or benefits of a good or service and reality. If there is a large difference then there may be a case for government intervention in the market.
• External Benefit

  The gains to economic agents outside the transaction following the consumption of a good or service by others.
• External Cost

  The cost to economic agents outside the transaction following the consumption of a good or service by others.
• Private benefit

  The gains to a household or firm following the consumption of a good or service.
• Private Cost

  The cost to society (those that are affected whether involved in the transaction or not) that arise following the production of a good or service.
• Social Optimum Position

  The ideal balance between supply and demand for society as a whole – it may differ to the actual market equilibrium.
• Social Benefit

  The gains to society (those that are affected whether involved in the transaction or not) that arise following the production of a good or service.
• Social Cost

  The cost to a household or firm following the consumption of a good or service.