Business Decision Making Terms

Comparative advantage

An agent (or an economy) has a comparative advantage in a productive activity (like collecting bananas or catching rabbits) when he/she has a lower opportunity cost of carrying on that activity than another agent.

Opportunity cost

Is the value of the next best alternative to a particular action.

Production possibility curve (PPC)

Captures all maximum output possibilities for two (or more) goods, given a set of inputs (or resources - that is time) if inputs are used efficiently.

Cost-benefit principle

An action should be taken if the marginal benefit is greater than the marginal cost.

Absolute advantage

An agent (or an economy) has an absolute advantage in a productive activity (like collecting bananas or catching rabbits) when he/she can carry on this activity with fewer resources (for example, less time)
than another agent.

Consumption possibility curve (CPC)

Represents all possible combinations of two goods that the economy can feasibly consume.

Stakeholders

Stakeholders are anyone who has an impact on, or is affected by business decisions and a large community that is composed of various interrelated groups of human and non-human entities.

organisational stakeholders

Managers, employees and investors responsible for governing the organisation .

market stakeholders

Customers, suppliers and competitors.

societal stakeholders

Community groups, government, physical environment (and those who represent the interests of the physical environment) and community groups such as non-governmental organisations.

normative perspective

Addresses how one “ought to behave” and as business decision makers they seek ethical and moral principles that guide them.

instrumental perspective

Addresses how business decision makers “need to behave” and the consequences of this on stakeholders.

corporate responsibility

Considers “what the business ought to do” and how attention is directed towards increasing the benefit and reducing the harm caused by the business decision across stakeholders.

social license

How much community support a project, company or industry has in a region.

ESG

Environmental, social, and governance (ESG) criteria are a set of standards for a company’s operations that socially conscious investors use to screen potential investments. Environmental criteria consider how a company performs as a steward of nature. Social criteria examine how it manages relationships with employees, suppliers, customers, and the communities where it operates. Governance deals with a company’s leadership, executive pay, audits, internal controls, and shareholder rights.

Australian Constitution

The Australian Constitution is the set of rules by which Australia is governed. Australians voted for the Constitution in a series of referendums. The Constitution establishes the composition of the Australian Parliament, describes how Parliament works and what powers it has.

Division of powers

Relates to legislative (law making) powers relating to topic areas that are allocated to one government or the other, and in some cases, to both governments.

Separation of powers

Distributes the power to govern between the parliament, executive and the judiciary.

Statute law

Legislation or Acts made by the parliament and is the most significant because various parliaments are constantly passing and/or amending new and/or old acts.

Case law

Made by judges in courts in the process of deciding disputes between people and/or entities.

Court hierarchy

The system of courts contains a hierarchy so that an appeal can be possible from a tribunal’s decision or a court’s decision to a higher court in the relevant court hierarchy.

Persuasive precedent

Persuasive precedent is a legal decision that a court can consider but is not obligated to follow. It can come from lower courts within the same jurisdiction, courts in different jurisdictions (like other states or countries), or even from the obiter dictum (non-binding statements) of a higher court.

Binding precedent

Lower courts and tribunals must follow the law as developed by the higher courts in what is meant by a binding precedent.

contract

A legally binding (and enforceable) agreement between at least two parties that defines and governs the rights and duties of the parties to an agreement.

breach of contract

Breach of a term of a contract (conditions - essential) and/or (warranties - not essential) might give rise to a claim for remedies in the form of damages and/or the right to terminate the contract.

sole trader

The owner simply and typically carries on the business themselves (and in often in their own name). There is no separate legal entity from that of the owner which means that all business contracts with customers and suppliers and a landlord are entered into by the owner and they are personally liable on those contracts.

partnership

Where two or more persons combine to carry on a business in common to make profit. Generally, all partners have an entitlement to be involved in business decisions, but this will also depend on the partnership agreement (partnership deed). One important feature of the partnership structure is the unlimited liability of the partners for debts and losses arising from the partnership business where creditors may have to resort to the partners’ personal assets to meet partnership debts.

company 

A company is a separate legal entity from its shareholders and directors where an artificial legal person (company or corporation) is brought into existence under the corporations law and can do most things a natural person can do, for example, operate a business, incur debts, sell assets, enter contracts. Debts and liabilities of the company are those of the company and the shareholders are not personally responsible for them.

Market

It is the set of all the consumers and suppliers who are willing to buy and sell a good or service.

Perfectly competitive market structure

• Firms are price-takers (cannot influence the market price)

• Many buyers and sellers

• Homogeneous (identical) goods

• No externalities because the benefits/costs do not spill over to third parties

• Goods are excludable (purchasing the good enables ownership and benefits) and rival (consumption reduces the availability of others)

• Full (perfect) information

• Freedom of entry and exit

Marginal benefit

Producing a certain unit of a given good generates extra benefit accrued by producing that unit.

Marginal cost

The extra cost of producing the unit of a good. (Keep in mind here that the relevant cost is the “opportunity cost” and not just the “absolute cost” of producing the good).

Marginal revenue

the additional total revenue generated by increasing product sales by 1 unit.

Law of supply

Describes the tendency for a producer to offer more of a certain good or service when the price of that good or service increases.

Short run

A period of time during which at least of one factor of production is fixed.

Long run

A period of time during which all factors of production are variable.

Variable factors of production

The cost associated with production tends to vary with the number of units produced eg. labour.

Fixed factors of production

The cost associated with production does not vary with the quantity produced eg. rent.

Accounting profit

Only takes into consideration a firm’s explicit costs eg. rent, wages, cost of raw materials

Economic profit

Includes a firm’s explicit eg. rent, wages, cost of raw materials and implicit costs eg. interest and/or wages foregone.

Price elasticity of supply

The percentage change in the quantity supplied resulting from a very small percentage change in price.

Supply chain

The activities required by the organisation to deliver goods or services to the consumer. It is a focus on the core activities within an organisation required to convert raw materials or component parts through to finished products or services.

Intellectual property

Creations of the mind: inventions, literary and artistic works, and symbols, names, images, and designs used in commerce.

Consumers

Buyers of any good or service.

Consumer reservation price

Also identified as the willingness to pay it denotes the maximum amount of money an individual is willing to pay for a certain good or service.

Utility

The satisfaction that an individual derives from consuming a given good or taking a certain action. It is measured in utils per unit of time.

Marginal utility

The added satisfaction a individual gets from consuming one more unit of a good or service and determine how much of an item individuals are willing to purchase.

Law of demand

Law of demand Represents the inverse (opposite) relationship between the price of a good and the quantity that buyers are willing to purchase in a defined time period.

Substitute goods

Two goods are substitutes when an increase in the price of one causes an increase in the quantity demanded of the other.

Complementary goods

Two goods are complements when a decrease in the price of one causes an increase in the quantity demanded of the other.

Normal good

As someone becomes wealthier, she tends to consume more of a particular good, for example expensive wine.

Inferior good

As someone becomes wealthier, she tends to consume less of a particular good, for example instant noodles.

Price elasticity of demand

Captures the percentage change in quantity demanded resulting from a very small percentage change in price.

Competition and Consumer Act 2010 (Cth)

A single national framework that protects consumers against unfair business conduct and practices, and is also a product safety regime.

Australian Consumer Law

Gives purchasers, lessees, and hirers guarantees of the quality of the good or service provided and also remedies against the supplier where the guarantee of quality is not met. It also provides buyers of consumer goods certain rights against suppliers – consumer guarantees.

Market demand

The specific quantity of a product that consumers can afford and want to buy at the given price of that product or service.

Market supply

the total quantity of a good or service that all producers are willing and able to sell at various prices, calculated by adding the individual supply of every firm in that market.

Market equilibrium

Market equilibrium occurs at price (P) and quantity (Q) and where buyers/consumers and sellers/firms agree to an exchange and at this equilibrium price demand = supply. The amount that sellers are willing to supply is equal to the amount consumers are willing to buy.

Market disequilibrium

Price is above or below the equilibrium price where the quantity demanded ≠ quantity supplied.

Rationing rule

Buyers who value the good more will be the first to buy it.

Consumer surplus

Represents the difference between what a consumer is willing to pay for a good or service (her reservation price) and what she actually pays for that good or service.

Producer surplus

Represents the difference between the price a seller receives for a good or service and what he was willing to receive for that good or service (her reservation price).

Total surplus

The sum of all economic surplus generated by a market.

Externalities

An externality is a cost or benefit imposed on third parties (that is those people other than the buyers and sellers of the good) and can be negative (harmful spillovers) and/or positive (beneficial spillovers).

Market failure

an economic situation where the free market fails to allocate resources efficiently, leading to a misallocation that doesn't maximize societal well-being.

Public goods

a commodity, product, or service that is non-excludable and non-rivalrous

Price ceiling

Represents a maximum allowable price imposed by the government.

Deadweight loss

The loss in economic surplus due to the market being prevented from reaching the equilibrium price and quantity where marginal benefit equals marginal cost.

Price floor

A minimum allowable price imposed by the government.

Company taxation

Taxation on company income or profits at a rate of 30%.

Sales taxation

Taxation applied to goods such as luxury cars and wine.

Taxation burden

The proportion of tax paid by a group (buyers or sellers). 

Monopoly

A market with only one firm and where the firm’s individual demand curve coincides with the market demand curve eg. Microsoft, Australia Post.

Monopolistic competition

A market with many firms providing a slightly differentiated product eg. restaurants, petrol stations

Oligopolistic competition

A market with a few firms providing products that are close substitutes eg. banking, grocery retailers

Barriers to entry

The supplier’s market is protected by barriers preventing the entry of new firms (competitors) eg. economies of scale, access to raw materials, intellectual property ownership, aggressive pricing tactics, government licences and use of technology.

Natural monopoly

Occurs because of increasing returns to scale.

Invisible hand principle

States that individuals’ independent efforts to maximise their gains (profits for the sellers and utility for the buyers) will generally be beneficial for society and result in the socially optimal allocation of resources.

Social optimum

When output occurs at the intersection of marginal social benefit (MSB) and marginal social cost (MSC), the socially optimal level of output is achieved. Also known as the allocatively efficient level of output. If output occurs at any other level, a market failure exists.

Marginal cost pricing

Is the practice of setting the price of a product to equal the extra cost of producing an extra unit of output. By this policy, a producer charges, for each product unit sold, only the addition to total cost resulting from materials and direct labour. Businesses often set prices close to marginal cost during periods of poor sales. 

Average cost pricing

This is a policy of setting prices close to average cost (often regulated by the government). It is a way to maximise sales, whilst maintaining normal profits. It is sometimes known as sales maximisation. It will be used by firms who are seeking to increase market share and who don’t seek to maximise profits.

Price discrimination

a pricing technique where the monopolist can ensure an economic profit. It is the practice of the seller charging different customers different prices for the same product not justified by cost differences. Price discrimination allows sellers to charge what buyers are willing to pay.

Mutual interdependence

Mutual interdependence (a decision by managers in one firm is likely to cause some reaction from managers in other firms in the same market, e.g. bank fees) and this interdependence results in decisions that are more complex than in other market forms.

Non-price competition

Non-price factors across a range of marketing strategies eg. advertising, service.

Game theory

The science of making good decisions in situations when one party’s best choice may depend on what others choose, and vice versa.

Dominant strategy

Preferred by a player irrespective of the strategy selected by the other player.

Prisoner’s dilemma

Co-operation would be beneficial for both players, but the dominant strategy for each is not to do so.

Cartel

A private agreement aimed at increasing the profit of its members by reducing competition in the market.

Dual Concern Model

Provides a framework for interaction that centres on two potential concerns that each party has when interacting with the other party. The first concern is a concern for oneself, and the second concern is a concern for the other party.

Sustainability

Meeting the needs of the present without compromising the ability of future generations to meet their needs. The concept is often broken into three core concepts or "pillars": economic, environmental, and social.

Stakeholder activism

A person who attempts to use their rights as a interested/affected party of a business to bring about change within.

Corporate governance

Is the policies or procedures by which a business operates. It involves balancing the interests stakeholders both internal and external to the business. 

Modern slavery

Describes situations where offenders use coercion, threats or deception to exploit victims and undermine their freedom. Practices that constitute modern slavery can include:

• human trafficking

• slavery

• servitude

• forced labour

• debt bondage

• forced marriage, and

• the worst forms of child labour