Theme 3 - Definitions

Business growth

An increase in the size of a firm measured by output

Internal growth (organic growth)

Expansion of a firm using its own resources

g

increasing output or opening new branches

External growth (inorganic growth)

Expansion of a firm by merging with or taking over another firm

Merger

When two firms agree to join together to form one business

Takeover (acquisition)

When one firm buys another firm

Horizontal integration

A merger between firms in the same industry and at the same stage of production

Vertical integration

A merger between firms at different stages of the production process

Forward vertical integration

A firm merging with a business closer to the consumer

Backward vertical integration

A firm merging with a supplier

Conglomerate integration

A merger between firms in completely different industries

Economies of scale

Cost advantages gained from increasing the scale of production

Internal economies of scale

Cost savings that arise within a firm as it grows

External economies of scale

Cost savings that occur outside a firm but within the industry

Technical economies of scale

Cost savings from improved production techniques and machinery

Managerial economies of scale

Cost savings from employing specialist managers

Purchasing economies of scale

Discounts received when buying inputs in bulk

Financial economies of scale

Lower interest rates and better access to finance for large firms

Marketing economies of scale

Spreading advertising costs over a larger output

Diseconomies of scale

When a firm becomes too large and average costs begin to increase

Labour diseconomies of scale

Reduced motivation and communication issues in large firms

Profit

The difference between total revenue and total costs

Revenue

The income a firm receives from selling goods or services

Total revenue (TR)

Price × quantity sold

Average revenue (AR)

Revenue per unit sold

Marginal revenue (MR)

The change in revenue from selling one more unit

Costs

The expenses incurred in the production of goods and services

Fixed costs

Costs that do not change with output

Variable costs

Costs that change with output

Total costs (TC)

The sum of fixed and variable costs

Average cost (AC)

Cost per unit of output

Marginal cost (MC)

The change in total cost from producing one more unit

Profit maximisation

When a firm produces at the level of output where the difference between total revenue and total cost is greatest

Revenue maximisation

When a firm produces where total revenue is highest

Sales maximisation

When a firm aims to maximise sales volume rather than profit

Satisficing

When a firm aims for a satisfactory level of profit rather than maximum profit

Market structure

The characteristics of a market that influence firm behaviour

Perfect competition

A market with many small firms

Monopolistic competition

A market with many firms selling differentiated products

Oligopoly

A market dominated by a few large firms

Monopoly

A market where one firm dominates with high barriers to entry

Barriers to entry

Obstacles that make it difficult for new firms to enter a market

Concentration ratio

The proportion of market share held by the largest firms in an industry