Business Economics: Firm Growth, Integration, Costs, and Revenues

Comprehensive vocabulary flashcards covering the growth of firms, mergers, acquisitions, corporate governance, costs of production, and revenue metrics.

Tax Incentives (Small Business)

Government financial support policies where firms in the UK with profits less than $£10,000$ are exempt from corporation taxes, and firms with a turnover lower than $£73,000$ are not liable for VAT.

Overt Barriers

Artificial barriers imposed by incumbent (dominating) firms in an industry to prevent new competition, such as extensive advertising, marketing strategies, or predatory and limit pricing strategies.

Minimum Efficient Scale (MES)

The lowest point on the average cost ($AC$) curve representing a firm's optimum size, beyond which a firm may choose not to grow larger in order to avoid diseconomies of scale.

Internal Growth (Organic Growth)

A firm increases its size by making more use of its existing product or increasing its range of product. A firm can increase its output by increasing its lab force or by increasing its investment.

External Growth (Inorganic Growth)

Growth achieved when a firm merges with or takes over another firm.

Merger (Integration)

An arrangement where two firms join together and produce under a single, common ownership.

Takeover (Acquisition)

A transaction in which a firm buys shares of another firm (usually greater than $25\%$) and becomes the new owner.

Friendly Takeover

A takeover that occurs when a firm purchases the shares of another firm based on a mutual agreement between both parties.

Hostile Takeover

A non-mutual takeover where a firm purchases the shares of another firm with the specific aim of taking over the organization without agreement.

Horizontal Integration

The joining together of two firms operating within the same industry at the exact same stage of production.

Rationalising

The process of eliminating excess resources and avoiding waste and duplication after a merger has taken place in order to generate cost savings.

Synergy

The benefit gained when integrating firms share ideas, knowledge, skills, technical know-how, and R&D, leading to increased productivity, lower average cost, and the potential generation of a USP.

Vertical Integration

A merger or takeover involving two firms in the same industry operating at different stages of production.

Forward Vertical Integration

A form of integration where a firm merges with or takes over another firm further up in the chain of production (in the next stage of production), such as a ticketing company acquiring an airline.

Backward Vertical Integration

A form of integration where a firm merges with or takes over another firm in the same industry at the previous stage of production, such as a chocolate manufacturer acquiring a cocoa plantation.

Conglomerate Integration

A situation where two firms join together that operate in completely different industries and at different stages of production.

Cross-Subsidization

A risk-spreading mechanism in conglomerate businesses where financial losses encountered in one industry are compensated by profits made in another industry.

Asset Stripping

The practice of acquiring a business at a purchase price lower than the total value of its assets, and then selling off the profitable components to generate short-term cash flow.

De-Merger

A process where a firm sells off a significant part of its existing operations, often following an unsuccessful takeover where expected economies of scale were not realised (such as British Gas de-merging from British Oil).

Principal-Agent Problem

A conflict arising from the divorce of ownership and control in large public limited companies, where directors (agents) pursue personal motives like higher remuneration, thereby compromising dividend returns for shareholders (principals).

Management Buy-Out

A resolution to the principal-agent problem where the existing management purchases the company from the current owners, aligning ownership and control and making managers personally liable for business performance.

Short Run

A time period during which a firm can increase its scale of production by adding more variable factors of production, while at least one factor of production remains fixed.

Long Run

A time horizon within which a firm can adjust all factors of production, meaning all factors are variable.

Fixed Cost (FC)

Costs that do not change with the level of output or activity and must be paid irrespective of production, applicable only when at least one factor is fixed (e.g., building rent).

Variable Cost (VC)

Costs that vary directly and proportionally with the level of production activity, equalling zero when output is zero (e.g., ingredients for a chocolate manufacturer).

Total Cost (TC)

The cumulative cost of producing a good or service, calculated as the sum of fixed and variable costs: $TC = FC + VC$.

Average Fixed Cost (AFC)

Fixed cost per unit of output, defined as $AFC = \frac{TFC}{Q}$; its curve continuously slopes downward as fixed overhead is spread over larger volumes of output.

Average Variable Cost (AVC)

Variable cost per unit of output, calculated as $AVC = \frac{TVC}{Q}$, which falls initially due to increasing returns to fixed factors and eventually rises due to diminishing returns.

Average Total Cost (ATC / AC)

The total cost per unit of output produced, calculated using the formula $ATC = \frac{TC}{Q}$.

Marginal Cost (MC)

The addition incurred to total cost as a result of producing one extra unit of output, defined as $MC = \frac{\Delta TC}{\Delta \text{Output}}$; it acts as the gradient of the total cost curve.

Total Revenue (TR)

The total amount of money received by a firm from its sales output over a period of time, calculated as $TR = P \times QTY$.

Average Revenue (AR)

The revenue generated per unit sold, equivalent to the product's unit price ($AR = \frac{TR}{QTY} = \text{Price}$); the firm's $AR$ curve also represents its demand curve.

Marginal Revenue (MR)

The additional revenue earned by a business from selling one extra unit of output, defined as $MR = \frac{\Delta TR}{\Delta \text{Output}}$.