Theme 1 – Definitions
Added value is the difference between the price of a good or service Corporate social responsibility (CSR) means taking decisions in a
and the cost of its material inputs. way that takes into account all stakeholders' interests.
Allocation of resources refers to the way resources are used and Cost of sales — another way of describing variable costs or direct
shared out (i.e. distributed) within the economic system costs, they are subtracted from turnover to give gross profit.
Assets – anything of value that can be made to yield benefits. Creative destruction occurs when new technologies lead to new or
Business assets can be physical such as buildings, machines etc. or improved products that drive competitors out of business.
they can be intangible such as a brand name or the skills of the Creditor— a person or company that the business owes money to,
workforce, or they may be purely financial. usually in exchange for materials or services.
Bank loan – a fixed sum of money borrowed from a bank and repaid Demand — the quantity of a good or service that consumers are
with regular monthly repayments plus interest over a fixed period. willing and able to buy, at a given price and at a given time.
Bank of England — the central bank of the UK, responsible for Demand curve — a graphical representation of the relationship
monetary policy and regulation of the banking system. between price and quantity demanded.
Banks channel funds from savers to borrowers and operate a Division of labour — involves individuals in specialising in one
payments system. particular type of activity in the workplace. Each employee has a
Brand – the name or symbol that is closely associated with a product specific task; repetition helps them to do it well.
or service. Brands add value, increase consumer loyalty and may Economic agents include all those who take decisions to buy,
attract a higher price. spend, produce, sell, or in any way affect how resources are used.
Break-even point – the level of output where neither a profit nor a Efficiency means using resources in the most economical way
loss is being made. The point at which total revenue equals total possible.
costs. Entry refers to the way profit in a growing market attracts
Cash flow — the movement of cash into (cash inflow) and out of businesses to produce for it. Profit acts as an incentive to enter the
(cash outflow) a business. market.
Cash flow forecasts project expected flows of cash income and cash Entrepreneurs take the risk of setting up, organising and operating
expenditure month by month. a business venture.
Ceteris paribus means all other things being equal, an approach Equilibrium price — the price at which quantity demanded is the
which enables economists to consider the impact of one change at a same as quantity supplied, sometimes called the market clearing
time. price.
Collateral — anything of value that can be seized by a lender if a Excess demand occurs when the quantity demanded outstrips the
loan is not repaid. Collateral is often property. (Sometimes quantity supplied. Some people who want to buy at the current price
called security.) will be unable to do so. The price is too low for the market to clear.
Competition causes businesses to strive for improvements that will Excess supply occurs when the quantity supplied is greater than
allow them to increase sales. This leads to an efficient allocation or the quantity demanded. Some suppliers will be unable to sell their
resources. goods at the current price. The price is too high for the market to
Competitive advantage — any feature of a business that enables it clear.
to compete effectively. It may be based on price, quality, service, Exchange rate — the price of one currency expressed in terms of
reputation, or innovation. another. It is determined by the interaction of demand for and supply
Competitive pricing — a pricing strategy that consists of matching of the currency.
your competitor’s prices or slightly undercutting them. Exit from the market means closing down production because of
Complements — goods and services that are bought together e.g. losses or low profits.
cars and petrol, DVDs and DVD players. Exports are goods and services produced domestically and sold in a
Consumer sovereignty describes the role of the consumer in foreign economy.
determining the allocation of resources. By buying what they want External benefits are benefits or positive side-effects that benefit a
most, consumers send a signal to producers about their preferences. third party who is neither the producer nor the consumer.
Contribution — price minus variable cost (P — VC). This can be used External costs are costs or negative side-effects imposed on a third
to calculate the break-even point. party who is neither the producer nor the consumer.
Theme 1 – Definitions
Factors of production are the inputs: land, labour, capital and Market failure occurs when social costs exceed social benefits.
enterprise. This frequently happens when there are negative externalities.
Fixed costs do not change with the level of output of the business. Market forces are the forces of demand and supply as they
Examples include rent, interest payments, managers' salaries and operate freely and interact to determine the allocation of resources.
business rates. Market growth — an expansion of the market based on increased
A free-market economy is one where there is no interference from sales.
outside agencies, such as the government. Market mapping — using a grid showing two features of a market,
Government expenditure — the money spent in the economy over e.g. price and consumer age. Individual brands are added to the
a period of time on publicly provided goods and services such as grid to show potential niches or gaps in the market.
education, healthcare, social welfare and the civil service. Market niche — a small part of an overall market which has
Government failure occurs when governments try to deal with certain special characteristics.
market failure, but in so doing create other problems. Market orientation — where the needs of the customer are the
Gross Domestic Product (GDP) — a measure of the total value of overriding priority in the production and marketing of products and
all goods and services produced, i.e. total income created within the services.
economy in one year. Market positioning shows how individual products or brands are
Gross profit — turnover minus cost of sales. Overheads (fixed seen in relation to their competitors by consumers.
costs), interest and tax have not yet been taken into account. Market research is any kind of activity that gives a business
Gross profit margin — a measure of profitability. Gross profit is information about its product or service, its customers, its
shown as a percentage of turnover. competitors or the market it operates in.
Imports — goods and services bought by buyers in one country from Market segmentation — the splitting up of the market into
sellers in other countries. groups of consumers with similar characteristics. Products and
Inferior goods sell better when incomes are falling. Their income services can be designed specifically for, and targeted at, a
elasticity of demand is negative. particular segment.
Inflation — a sustained rise in the general price level or a fall in Market share is the percentage of the total market buying one
the value of money. firm's product.
Infrastructure includes transport facilities, communications, and Mass market — a large market which includes the majority of the
access to energy and water. relevant population.
Interest rate – a payment in percentage terms for the use of a sum Negative externalities are external costs that have a detrimental
of borrowed money. It can be seen as the price of money. effect on the lives of people who neither bought nor sold the
Leasing — a long term rental agreement that allows businesses to product.
use assets without having to pay for them outright, thereby freeing Niche market — a small part of the overall market that has certain
up funds for other uses. Often used for vehicles, machinery, etc. special characteristics.
Liability means responsibility for the financial debts of the business. Normal goods sell better when incomes are rising; they have
A liability is a legal claim for payment. positive income elasticity of demand.
Limited liability — in the event of financial problems and the Operating profit — the most commonly used measure of business
closure of a business, the responsibility for any outstanding debts is profit, calculated by subtracting all overheads (fixed costs) from
limited to the owner(s)' original investment. gross profit.
Loan — the use of someone else's money for a period of time. Operating profit margin — operating profit shown as a
Usually involves regular repayments and payment of interest. percentage of turnover.
Margin of safety — the difference between the actual level of Opportunity cost represents cost in terms of an alternative to the
output and the break-even level of output. item actively chosen. Every spending decision has an opportunity
Market — any medium in which buyers and sellers interact and cost, which is what was foregone to get the preferred product.
agree to trade at a price. Ordinary share capital — the money raised by selling the
Market clearing means there is no excess supply and no excess ordinary shares of a plc business. These are stakes in the business;
demand. shareholders will receive a dividend (if the business is profitable).
Theme 1 – Definitions
Overdraft — a facility that allows a business (or an individual) to Scarcity describes the way people's wants and needs always exceed
borrow up to an agreed limit. A flexible and useful form of finance, it the resources available to satisfy them.
is particularly suited to dealing with cash flow problems. Secondary research — the use of information about the market
Positive externalities are external benefits that are experienced by that already exists. Sometimes called desk research.
third parties but paid for by someone else. Shareholders are part-owners of the business. They may have
PLC – stands for Public Limited Company. This is a form of company played a part in financing the business directly or have bought
organisation with limited liability, but its shares are available to the shares from someone else or on the Stock Exchange.
public and are quoted on the stock exchange. Skill shortages occur when demand for people with scarce skills
Primary research — gathering original information about the exceeds the supply of people who have them.
market from first hand sources Sometimes called field research. Social benefits are the total benefits of producing goods and
Private limited companies have limited liability but cannot raise services, calculated by adding together the private
share capital from the public. and external costs.
Private sector — that part of the economy which is run for private Social costs are the total costs of producing goods and services,
profit and is not controlled by the state. It is owned by individuals. calculated by adding together the private and external costs.
Product differentiation means giving each product specific design Sole trader — the simplest form of business organisation that is
features that will distinguish it from competing products. Branding owned and operated by an individual. The owner has unlimited
can be an important part of this. liability.
Profit — the difference between total sales revenue and total costs. Specialisation refers to the way in which people, organisations and
Profit margin is profit as a percentage of turnover. economies concentrate on specific economic activities, often
Profit maximisation is an important business objective but more because they have some advantage in that field.
important to sone than to others. Stakeholder — any individual or group with an interest in the
Profit-signalling mechanism — the means by which the incentive actions of a business. Stakeholders include: employees, owners and
of profit induces businesses to produce what consumers want. shareholders, customers, suppliers and the local community.
Public limited companies (PLCs) have limited liability and can Statement of comprehensive income — shows a company's net
raise finance by selling shares to anyone. profit or loss, over a given time period.
Public sector — industries or services provided or funded by the Structural change — when patterns of demand change, some
government and not owned by private individuals. industries grow while others shrink, and some businesses will exit the
Qualitative research — a market research method that involves market.
finding out about the motivation and preferences of consumers. Substitute — a good or a service that can be used in place of
Quantitative research — a market research method that involves another, e.g. different brands of washing powder or makes of
numerical measurement. television.
Retained profit — an important source of finance for business Supply — the amount of a good or service that producers are willing
expansion. It is the profit left after interest, tax and dividends have and able to provide, at a given price and at a given time.
been deducted from operating profit. Supply curve — a graphical representation of the relationship
Revenue — the income of a business raised by selling its goods or between price and quantity supplied.
services. Taxation — payments made to the government by individuals and
Risk measures the likelihood that a particular event may or may not businesses, to provide revenue for government spending. Commonly
occur. used taxes include: income tax, VAT, corporation
Sales maximisation means selling as much as possible. tax and excise duty.
Sampling - during market research, a small section or sample of the Trade credit — the time allowed by a supplier before a business
market is chosen as being representative of the whole. must make payment. Commonly 30-60 days, it helps the customers
Satisficing occurs when a business earns enough profit to keep the cash flow at the expense of the that of the seller
owners happy but no attempt is made to maximise profits. Trade-off — a situation where having more of one thing leads to
less of another. It is linked to the concept of opportunity cost.
Theme 1 – Definitions
Turnover — sales revenue, i.e. total income generated by a business Unlimited liability — the owner of a business is responsible for all
selling its goods and services over a period of time. the debts of the business should it fail. This applies to sole traders
Unemployment occurs when people who are able and willing to and partnerships.
work cannot find a paying job. Variable costs — costs of production that vary with the level of
Under-consumption occurs when products that are socially output e.g. raw materials and distribution costs.
desirable are too expensive for everyone to cover the costs Venture capital — A form of business finance, unsecured funding
themselves. provided by individuals or specialist firms in return for a proportion of
Unique Selling Point (USP) — a single feature that is noticeably the company's shares.
different from those of all competing products. Working capital is finance to cover business costs when sales
revenue is slow to come in.
