Theme 3 definitions Econ ht1

Private sector organisations

firms which are owned either by shareholders or private individuals, e.g. limited companies, sole traders, partnerships

Public sector organisations

organisations that are controlled by the government e.g. NHS, schools

Divorce of ownership from control

means that one group of people own the company, e.g. shareholders; but another group of people run the company on a day-to-day basis, e.g. managers, directors

Principal-agent problem

this means the agents, i.e. directors and managers, may not always make decisions in the best interests of the shareholders, i.e. the principal

Not-for-profit organisations

comprise mainly charities, e.g. Oxfam. Their objective is not profit but to use any surplus they generate in pursuit of their goals. Also includes environmental groups such Greenpeace and the WWF, trusts and co-operatives.

Economies of scale (EOS)

factors which cause average cost to fall as output rises

Internal EOS

these benefit only the firm, e.g. purchasing EOS, technical EOS, financial EOS

External EOS

these benefit the industry as a whole, e.g. access to pool of skilled labour

Diseconomies of scale (DEOS)

factors that cause average costs to rise as firms get bigger, e.g. co-ordination and communication, motivation, transport costs

Barriers to entry

factors that prevent new firms from entering a market, e.g. initial capital costs, marketing & branding, economies of scale

Internal growth

means growing by expanding your current market or finding new markets

External growth

means growing by taking over or merging with other firms, e.g. horizontal integration, vertical integration

Merger

occurs when two firms come together to form one new firm

Takeover

occurs when one firm buys another firm by purchasing more than 50% of it's share capital. Takeovers can be classified as either friendly or hostile.

Vertical integration

means two firms merging at different stages of production or distribution

Forward vertical integration

this is where a firm merges with or takes over another firm at the next stage of production or distribution, e.g. a brewery taking over a chain of pubs

Backward vertical integration

this is where a firm takes over or merges with another firm at a previous stage of production or distribution, e.g. brewery taking over a hops farm

Horizontal integration

this means two firms merging at the same stage of production or distribution, e.g. two supermarket chains merging

Conglomerate

this is when a firm merges and takes over businesses in unrelated industries, e.g. Unilever, Procter & Gamble

Demerger

means a firm splitting itself into two or more separate parts to create two or more separate businesses

Predatory pricing

means a firm setting their prices below the AC of weaker competitors in order to force them out of the market

Limit pricing

means a firm(s) setting prices below the predicted AC of new entrants in order to deter them from coming into the market

Competition & Markets Authority

a government funded organisation that oversees and enforces laws that attempt to eliminate anti-competitive business practices in the UK