Common Accounting Terminology Glossary (Alphabetical order) Account An account is a record used to properly classify the activity recorded

in the General Ledger. Account balance An account balance is the sum of debit entries minus the sum of credit entries in an account. If positive, the difference is called a debit balance; if negative, a credit balance. Accounting Accounting is recording and reporting of financial transactions, including the origination of the transaction, its recognition, processing, and summarization in the financial statements. Bookkeeping: The act of systematically recording the financial transactions affecting a business. Accounts Payable Accounts Payable is an amount owed for delivered goods or completed services. Accounts Payable is a liability. Accounts Receivable Account Receivable is an amount owed a completed transaction of sales or services rendered. For example-student account balances. Accounts Receivable is an asset. Accrual Basis Accrual basis is a method of accounting that recognizes revenue when earned, rather than when collected and expenses when incurred rather than when paid. Accrued interest The interest due on a bond since the last interest payment was made. The buyer of the bond pays the market price plus accrued interest. Asset An asset is what the entity owns. For example- land, property, buildings, equipment, cash in bank accounts, other investments and accounts receivable. Audit audit is a formal examination and official endorsement of the accuracy of the financial statements of the college by an independent certified public accountant (CPA). Based on GAAP and FASB rules the college is required to have an audit performed each fiscal year. Balance Sheet A Balance Sheet is a summary report of the colleges assets, liabilities and fund balance (net assets) on a specific date. Income Statement An Income Statement is a summary report that shows revenues and expenses over a specific period of time, typically a month, quarter or fiscal year. Budget A budget is an estimate of activity for a fiscal year or period. A budget can be created for a department or a project.

Cost of Goods Sold Cost of Goods Sold (CGS) is the cost of items purchased for resale. For example-the bookshop purchases textbooks to sell in the bookshop, Uncommon Grounds buy rolls that will be used to make sandwiches that will be sold in uncommon Grounds. Credit A credit is an entry on the right side of a double-entry accounting system that represents the reduction of an asset or expense or the addition to a liability or revenue. Debit A debit is an entry on the left side of a double-entry accounting system that represents the addition of an asset or expense or the reduction to a liability or revenue. Double-Entry Accounting Double-entry accounting is a method of recording financial transactions in which each transaction is entered in two or more accounts and involves twoway, self-balancing posting. Total debits must equal total credits. The college uses this method of accounting. Cost - The monetary value of resources used or sacrificed or liabilities incurred to achieve an Objective, such as to acquire or produce a good or to perform an activity or service. Expense An expense is funds paid by the college. For example paychecks to employees, reimbursements to employees, payments to vendors for goods or services. Financial Statements Financial Statements are a series of reports showing a summary view of the various financial activities of the college at a specific point in time. Each statement tells a different story about the financial activity of the college. Fixed Asset A fixed asset is any tangible item with a useful life of more than one year and a unit cost of $5,000 or more. Journal Entry A journal entry is a group of debit and credit transactions that are posted to the general ledger. All journal entries must net to zero so debits must equal credits. Net Income (loss) Net Income (loss) is the amount the college, a department or a project made or lost for a specific period of time. To arrive at this number take total revenues minus total expenses. Revenue Revenue is funds collected by the college; it can also be called income. For exampletuition, fees, rentals, income from investments. Subsidiary Ledger A subsidiary ledger is a group of accounts containing the detail of debit and credit entries. For example-detail information contained in Accounts Payable. Accounts Receivable Turnover: A measure used to determine a company's average collection period for receivables. Usually computed by dividing net sales (or net credit sales) by average accounts receivable.

Amortization: The gradual and periodic reduction of an amount over time. It can apply to either the periodic write-down of an asset (see depreciation) or a gradual extinguishment of a debt (payments reducing loan principal). Annual Report: A report prepared by a business entity at the end of its calendar or fiscal year. It presents a company's financial position and operating results for use by interested parties, including potential investors, creditors, stockholders, and employees. Audit: The result of an independent accountant's review of the financial statements and their footnotes to ensure compliance with generally accepted accounting principles (GAAP) and to express an opinion on the fairness of the financial statements. Bad Debt: An uncollectible Account Receivable. Balance sheet: A balance sheet is an itemized statement which lists the total assets and the total liabilities of a given business to show its net worth at a given moment in time (like a snapshot). Bank Reconciliation: Verification that your bank statement and your checkbook balance. Bankruptcy: This involves a discharge of the debtor's obligations through court order. The purpose of bankruptcy is to provide the debtor with a fresh start and to have an equitable distribution of the debtor's assets among the creditors. Bond: A contract between a borrower and a lender. The borrower promises to pay a specified rate of interest for each period the bond is outstanding and repay the principal at the maturity date. Book Value: The net amount (original value plus or minus any adjustments such as depreciation) shown in the accounts for an asset, liability, or owners' equity item. Break-even point: The volume point of sales at which revenues and costs are equal; a combination of sales and costs that will yield a no profit/no loss operation. Budget: A formal statement of management's expectations of sales, expenses, volume, and other financial transactions of an organization. A budget is a tool for planning and control. In the beginning it can act as a plan and in the end it can act as control to measure performance against so that future plans can be improved. Business: An organization created with the objective of making a profit from the sale of goods or services.

Business Failure: According to law, business failure can be either "technical insolvency" or "bankruptcy." In technical insolvency a business is unable to meet current obligations even if the total assets exceed total liabilities. In bankruptcy, liabilities exceed the market value of the assets and a negative net worth exists. (See accountant's equation). Capital: Property or money used and owned by a business and used to acquire future income or benefits. Capital Account: An account where an owner's or partners' interest in the business is recorded. It is increased by owner investment and net income and decreased by withdrawals and net losses. Capital Gain or Loss: The difference between the market and book value at purchase or other acquisition realized at the sale or disposition of a capital asset. Capital Expense: A capital expenditure is one that will benefit one year or more. It can increase the quantity or quality of services to be gained from the asset. It is charged to an asset account. Cash Basis: A bookkeeping method that recognizes revenue and expenses at the time of cash receipt or payment. (Opposite of Accrual Basis.) Cash Flow: Generally refers to the difference between cash receipts and disbursements over a specific period of time. Common Stock: A class of stock issued by a corporation. It is the most frequently issued type of stock. It carries with it a voting right, however is secondary in priority to preferred stock in dividend and liquidation rights. Consignment: In a consignment, the consignor (owner of the goods) transfers goods to the consignee. The consignor retains legal title and includes the goods in his inventory. The consignee is acting as an agent in an attempt to sell the goods. Although the consignee is temporarily holding the goods, the inventory is not an asset on his books. If a sale occurs, the consignee deducts from the selling price his commission and related expenses, remitting the balance to the consignor. Corporation: A type of business organization chartered by a state and given many of the legal rights as a separate entity. Ownership is represented by transferable shares of stock. Cost of Goods Sold: COGS; The amount determined by subtracting the value of the ending merchandise inventory from the sum of the beginning merchandise inventory and the net purchases for the fiscal period. Current Assets: Current assets are those assets of a company that are expected to be converted to cash, sold, or consumed during the normal operating cycle of the business (usually one year).

Examples are cash, accounts receivable, short-term investments, US government bonds, inventories, and prepaid expenses. Current Liabilities: Liabilities to be paid within one year of the balance sheet date. Current Ratio / Working Capital Ratio.: Also known as Working Capital Ratio. A measure of liquidity of business. Equal to current assets divided by current liabilities. Depreciation: The expense recognized in writing off the cost of a plant or machine over its useful life, giving consideration to wear and tear, obsolescence, and salvage value. Methods vary. Examples are straight line (SL), accelerated methods such as sum-of-the-years digits (SYD), and double-declining balance (DDB) methods. Primarily accelerated depreciation is chosen for a business' tax expense but straight line is chosen for its financial reporting purposes. Dividend: That portion of a corporation's earnings that is paid to the stockholders. Drawings: Distribution to the owner(s) of a sole proprietorship or partnership. Drawings Account: The account used to show the withdrawals of earnings by the owner(s) of a sole proprietorship or partnership. Earnings per Share: The computation of a corporation's earnings based on the number of stock shares outstanding at a given point in time. Fair Market Value: The price at which a willing seller will sell, and a willing buyer will buy, when neither is under compulsion to sell or buy and both have reasonable knowledge of relevant facts. FASB: Financial Accounting Standards Board. FIFO: First In First Out type of inventory valuation. The first goods purchased are assumed to be the first goods sold. Fiscal Year: A business' reporting year, covering a 12-month month period. (Not necessarily ending on December 31.) Fixed Assets: Permanent assets of a company required for the regular conduct of business which will not be converted into cash during the next year. Examples are land, building, furniture and fixtures. Fixed Cost: Fixed costs are operating expenses that are incurred when providing necessities for doing business and have no relation to the volume of production and sales (as opposed to "variable costs"). Examples are rent, property taxes, and interest expense.

FOB: Free-On-Board Destination. The seller of merchandise bears the shipping costs and maintains ownership until the merchandise is delivered to the buyer. Franchise: A business that has been licensed to sell the product of a manufacturer or to offer a particular service in a given area. GAAP: Generally Accepting Accounting Principles. A priority listing made up of statements of accounting principles issued by the AICPA (American Institute of Certified Public Accountants) and FASB (Financial Accounting Standards Board) General Journal: (GJ) A book or original entry in a double-entry system. The journal lists transactions and indicated accounts to which they are posted. The general journal includes all transactions which aren't included in specialized journals used for cash receipts, cash disbursements, and other common transactions. General Ledger: (GL) A book in which monetary transactions of a business are posted (in the form of debits and credits) from a journal. It is the final record from which financial statements are prepared. The general ledger accounts are often the control accounts which report totals of details included in subsidiary ledgers. Goodwill: An intangible asset that exists when a business is valued at more than the fair market value of its net assets. Goodwill is usually due to reputation, good customer relations, etc. Gross Profit: The amount by which the net sales exceed the cost of goods sold. Gross Sales: Total recorded sales before deducting any sales discounts or sales returns and allowances. Internal Control: Policies and procedures designed to provide reasonable assurance that a company's objectives will be achieved. It consists of control environment, risk assessment, control activities, information and communications and monitoring. Interest: The cost of the use of money. Interest Rate: The cost of money expressed as an annual percentage. Inventory: Goods held for sale or resale. Inventory Turnover Ratio: A measure of the management of inventory computed by dividing cost of goods sold (COGS) by the average inventory for a period of time. Invoice: An itemized list of goods shipped or services rendered with cost.

Just-in-time Inventory: An inventory system that minimizes inventory costs. It arranges for suppliers to deliver small quantities of raw materials just before those units are needed in production. Storing, insuring, and handling raw materials are costs that add no value to the product, and so are minimized in a just in time system. Kiting: Drawing a bank check on insufficient funds to take advantage of the lag time (time interval) required for collection. Certainly not ethical, and under some circumstances very illegal! Leases: Long-term non-cancelable commitments. In a lease, the lessee acquires the right to use property owned by the lessor. Even though no legal transfer of title occurs, many leases transfer substantially all the risks and ownership benefits. Limited Partnership: A limited partnership is one in which one or more partners (but not all) have limited liability up to their investment to creditors in the event of the failure of the business. The general partner manages the business. Limited partners are not involved in daily activities. Liquidation: The process of dissolving a business by selling the assets, paying the debts, and distributing the remaining equity to the owners. Liquidity: The availability of cash or ability to obtain it quickly. Also used to determine debt repayment ability Long-term Liabilities: These are liabilities in your business that are due in more than one year. For example mortgage payable. Net Assets: Owners Equity. The ownership interest in the assets of an entity. Equals total assets minus total liabilities. Net Income: The difference between your business' total revenues and its total expenses. This caption and amount is usually found at the bottom of a company Income Statement (also known as "The Bottom Line"). Net Operating Loss: A net operating loss results when business expenses exceed business income for the operating period. Operating Lease: A simple rental agreement. Operating Leverage: The extent to which fixed costs are part of a company's cost structure; the higher the proportion of fixed costs, the faster income increases or decreases with sales volumes.

Operating Performance Ratio: An overall measure of the efficiency of operations during a period computed by dividing net income by net sales. Outstanding Stock: Issued stock that is still being held by investors. Owners' Equity. Net Assets. The ownership interest in the assets of an entity. Equals total assets minus total liabilities. Partnership: A Partnership is an unincorporated business that has more than one owner. . Prepaid Expenses: Amounts paid in advance to a creditor or vendor for goods or services. Insurance premiums are a good example. Prepaid Expenses are a current asset because you paid for goods or services you have not yet received. Profitability: A company's ability to generate revenues in excess of the costs incurred in producing those revenues. Profit and Loss Statement: Also known as an Income Statement, or P & L. This statement shows your revenues and expenses for a specific period of time. Proprietorship: A business owned by one person. Reconciliation: A determination of the items necessary to bring the balances of two or more related accounts or statements into agreement. Recovery Period: The time period designated by Congress for depreciating business assets. Can also be thought of as the "life" of an asset (but is usually shorter). Retained Earnings: Profits of the business that have not been paid out to the owners as of the balance sheet date. The earnings have been "retained" for use in the business. Retained Earnings is an account in the equity section of the balance sheet. Return: A key consideration in the investment decision. It is the reward for investing. The investor must compare the expected return for a given investment with the risk involved. Return on Investment: ROI. A measure of operating performance and efficiency in using assets computed by dividing net income by average total assets. Revenues: Increases in a company's resources from the sale of goods or services Salvage or Residual Value: Estimated value (or actual price) of an asset at the end of its useful life after disposal costs.

Shareholders or Stockholders: Individuals or organizations that own shares of stock of a corporation. Solvency: A company's long-run ability to meet all financial obligations. Sole Proprietorship: A business owned by one person. Trade credit: Credit one firm grants to another firm for the purchase of goods or services. Transactions: Exchange of goods or services between businesses or individuals. Can also be other events having an economic impact on a business. Trial Balance: A listing of all account balances that provides a test of whether total debits equals total credits. Unearned Revenue: Money received by a business before it is earned. It is a liability to your company until it is earned. Useful Life: The life that an asset is expected to be useful to the company. Value: The worth of something. Usually defined as the monetary or street value of an item, such as "Fair Market Value." Yield: The return on investment that an investor receives from dividends or interest expressed as a percentage of the current market price of the security (or if already owned, price paid). Z-Score: A z-score is a total arrived at by combining several normal business ratios. The weight given each ratio produces a score which is said to indicate the health of a business. A z-score below 1.5 usually means that the company is close to bankruptcy.

Acquisition The acquiring of control of one corporation by another. In "unfriendly" takeover attempts, the potential buying company may offer a price well above current market values, new securities and other inducements to stockholders. The management of the subject company might ask for a better price or try to join up with a third company. Amortization Accounting for expenses or charges as applicable rather than as paid. Includes such practices as depreciation, depletion, write-off of intangibles, prepaid expenses and deferred charges. Annual report The formal financial statement issued yearly by a corporation. The annual report shows assets, liabilities, revenues, expenses and earnings - how the company stood at the close of the business year, how it fared profit-wise during the year, as well as other information of interest to shareowners. Arbitrage A technique employed to take advantage of differences in price. If, for example,ABC stock can be bought in New York for $10 a share and sold in London at $10.50, an arbitrageur may simultaneously purchase ABC stock here and sell the same amount inLondon, making a profit of $.50 a share, less expenses. Arbitrage may also involve the purchase of rights to subscribe to a security, or the purchase of a convertible security and the sale at or about the same time of the security obtainable through exercise of the rights orof the security obtainable through conversion. . Auditor's report Often called the accountant's opinion, it is the statement of the accounting firms work and its opinion of the corporation's financial statements, especially if they conform to the normal and generally accepted practices of accountancy. Balance sheet A condensed financial statement showing the nature and amount of a Companys assets, liabilities and capital on a given date. In dollar amounts, the balance sheet shows what the company owned, what it owed and the ownership interest in the company of its stockholders

Bearer bond A bond that does not have the owner's name registered on the books of the issuer. Interest and principal, when due, are payable to the holder. Blue chip A company known nationally for the quality and wide acceptance of its products or services, and for its ability to make money and pay dividends. Bond Basically an IOU or promissory note of a corporation, usually issued in multiples of $1,000 or $5,000, although $100 and $500 denominations are not unknown. A bond is evidence of a debt on which the issuing company usually promises to pay the bondholders a specified amount of interest for a specified length of time, and to repay the loan on the expiration date. In every case a bond represents debt - its holder is a creditor of the corporation and not a part owner, as is the shareholder.

Book value An accounting term. Book value of a stock is determined from a company's records, by adding all assets then deducting all debts and other liabilities, plus the liquidation price of any preferred issues. The sum arrived at is divided by the number of common shares outstanding and the result is book value per common share. Book value of the assets of a company or a security may have little relationship to market value. Broker An agent who handles the public's orders to buy and sell securities, commodities or other property. A commission is charged for this service Bull One who believes the market will rise. Bull market An advancing market. Bear Someone who believes the market will decline. Bear market A declining market Capital gain or capital loss Profit or loss from the sale of a capital asset. The capital gains provisions of the tax law are complicated. You should consult your tax advisor for specific information. Capitalization Total amount of the various securities issued by a corporation. Capitalization may include bonds, debentures, preferred and common stock, and surplus.Bonds and debentures are usually carried on the books of the issuing company in terms of their par or face value. Preferred and common shares may be carried in terms of par or stated value. Stated value may be an arbitrary figure decided upon by the director or may represent the amount received by the company from the sale of the securities at the time of issuance. Cash flow Reported net income of a corporation plus amounts charged off for depreciation, depletion, amortization, and extraordinary charges to reserves, which are bookkeeping deductions and not paid out in actual dollars and cents. Common stock Securities that represent an ownership interest in a corporation. If the Company has also issued preferred stock, both common and preferred have ownership rights. Common stockholders assume the greater risk, but generally exercise the greater control and may gain the greater award in the form of dividends and capital appreciation. The terms common stock and capital stock are often used interchangeably when the company has no Preferred stock. Conglomerate A corporation that has diversified its operations usually by acquiring Enterprises in widely varied industries.

Consolidated balance sheet A balance sheet showing the financial condition of aCorporation and its subsidiaries Convertible A bond, debenture or preferred share that may be exchanged by the owner for common stock or another security, usually of the same company, in accordance with the terms of the issue. Coupon bond Bond with interest coupons attached. The coupons are clipped as they come due and presented by the holder for payment of interest Current assets Those assets of a company that are reasonably expected to be realized in cash, sold or consumed during one year. These include cash, U.S. Government bonds, receivables and money due usually within one year, as well as inventories. Current liabilities Money owed and payable by a company, usually within one year. Debenture A promissory note backed by the general credit of a company and usually not secured by a mortgage or lien on any specific property Depletion accounting Natural resources, such as metals, oil, gas and timber, that ,Conceivably can be reduced to zero over the years, present a special problem in capital Management. Depletion is an accounting practice consisting of charges against earnings based upon the amount of the asset taken out of the total reserves in the period for which accounting are made. A bookkeeping entry, it does not represent any cash outlay nor are any funds earmarked for the purpose. Depreciation Normally, charges against earnings to write off the cost less salvage value, of an asset over its estimated useful life. It is a bookkeeping entry and does not represent any cash outlay nor are any funds earmarked for the purpose. Discretionary account An account in which the customer gives the broker or someone else discretion to buy and sell securities or commodities, including selection, timing, amount, and price to be paid or received. Diversification Spreading investments among different types of securities and various companies in different fields. Dividend The payment designated by the board of directors to be distributed pro rata among the shares outstanding. On preferred shares, it is generally a fixed amount. Oncommon shares, the dividend varies with the fortunes of the company and the amount of cash on hand, and may be omitted if business is poor or the directors determine to withhold earnings to invest in plant and equipment. Sometimes a company will pay a dividend out of past earnings even if it is not currently operating at a profit.

Dow Theory A theory of market analysis based upon the performance of the Dow Jones Industrial Average and transportation stock price averages. The theory says that the market is in a basic upward trend if one of these averages advances above a previous important high, accompanied or followed by a similar advance in the other. When both averages dip below previous important lows, this is regarded as confirmation of a downward trend. The Dow Jones is one type of market index Earnings report / income statement A statement, also called an income statement, issued by a company showing its earnings or losses over a given period. The earnings report lists the income earned, expenses and the net result Equity The ownership interest of common and preferred stockholders in a company. Also refers to excess of value of securities over the debit balance in a margin account. Ex-dividend A synonym for "without dividend." The buyer of a stock selling ex-dividend does not receive the recently declared dividend. When stocks go ex-dividend, the stock tables include the symbol "x" following the name Fixed charges A company's fixed expenses, such as bond interest, which it has agreed to pay whether or not earned, and which are deducted from income before earnings on equity capital are computed. Free and open market A market in which supply and demand are freely expressed in Terms of price. Contrasts with a controlled market in which supply, demand and price may all be regulated. Holding company A corporation that owns the securities of another, in most cases with voting control. Income bond Generally income bonds promise to repay principal but to pay interest only when earned. In some cases unpaid interest on an income bond may accumulate as a claim against the corporation when the bond becomes due. An income bond may also be issued in lieu of preferred stock. Indenture A written agreement under which bonds and debentures are issued, setting forth maturity date, interest rate and other terms. . Interest Payments borrowers pay lenders for the use of their money. A corporation pays interest on its bonds to its bondholders Investment Company A company or trust that uses its capital to invest in other companies. There are two principal types: the closed-end and the open-end, or mutual fund. Shares in closed-end investment companies, some of which are listed on the New York Stock, Exchange, are readily transferable in the open market and are bought and sold like other shares.

Capitalization of these companies remains the same unless action is taken to change, which is seldom. Open-end funds sell their own shares to investors, stand ready to buy back their old shares, and are not listed. Open-end funds are so called because their capitalization is not fixed; they issue more shares as people want them. Leverage The effect on a company when the company has bonds, preferred stock, or both outstanding. Example: If the earnings of a company with 1,000,000 common shares increases from $1,000,000 to $1,500,000, earnings per share would go up from $1 to $1.50, or an increase of 50%. But if earnings of a company that had to pay $500,000 in bond interest increased that much, earnings per common share would jump from $.50 to $1 a share, or 100%. Liabilities All the claims against a corporation. Liabilities include accounts, wages and salaries payable; dividends declared payable; accrued taxes payable; and fixed or long-term liabilities, such as mortgage bonds, debentures and bank loans. Liquidation The process of converting securities or other property into cash. The dissolution of a company, with cash remaining after sale of its assets and payment of all indebtedness being distributed to the shareholders. Liquidity The ability of the market in a particular security to absorb a reasonable amount of buying or selling at reasonable price changes. Liquidity is one of the most important characteristics of a good market. Manipulation An illegal operation. Buying or selling a security for the purpose of creating false or misleading appearance of active trading or for the purpose of raising or depressing the price to induce purchase or sale by others. Merger Combination of two or more corporations. Money market fund A mutual fund whose investments are in high-yield money market instruments such as federal securities, CDs and commercial paper. Its intent is to make such instruments, normally purchased in large denominations by institutions, available indirectly to individuals Mortgage bond A bond secured by a mortgage on a property. The value of the property may or may not equal the value of the bonds issued against it Municipal bond A bond issued by a state or a political subdivision, such as county, city, town or village. The term also designates bonds issued by state agencies and authorities. In general, interest paid on municipal bonds is exempt from federal income taxes and state and local taxes within the state of issue. However, interest may be subject to the alternative minimum tax (AMT).

Mutual fund (See: Investment company) Over-the-counter A market for securities made up of securities dealers who may or may not be members of a securities exchange. The over-the-counter market is conducted over the telephone and deals mainly with stocks of companies without sufficient shares, stockholders or earnings to warrant listing on an exchange. Over-the-counter dealers may act either as principals or as brokers for customers. The over-the-counter market is the principal market for bonds of all types Par In the case of a common share, par means a dollar amount assigned to the share by the company's charter. Par value may also be used to compute the dollar amount of common shares on the balance sheet. Par value has little relationship to the market value of common stock. Many companies issue no-par stock but give a stated per share value on the balance sheet. In the case of preferred stocks it signifies the dollar value upon which dividends are figured. With bonds, par value is the face amount, usually $1,000. Portfolio Holdings of securities by an individual or institution. A portfolio may contain bonds, preferred stocks, common stocks and other securities. Preferred stock A class of stock with a claim on the company's earnings before payment may be made on the common stock and usually entitled to priority over common stock if the company liquidates. Usually entitled to dividends at a specified rate - when declared by the board of directors and before payment of a dividend on the common stock - depending upon the terms of the issue Price-to-earnings ratio A popular way to compare stocks selling at various price levels. The P/E ratio is the price of a share of stock divided by earnings per share for a 12-month period. For example, a stock selling for $50 a share and earning $5 a share is said to be selling at a price-to-earnings ratio of 10. Record date The date on which you must be registered as a shareholder of a company inorder to receive a declared dividend or, among other things, to vote on company affairs. Sinking fund Money regularly set aside by a company to redeem its bonds, debentures or preferred stock from time to time as specified in the indenture or charter. Stock (See: Capital stock, Common stock, Preferred stock) Stock exchange An organized marketplace for securities featured by the centralization of supply and demand for the transaction of orders by member brokers for institutional and individual investors Yield Also known as return. The dividends or interest paid by a company expressed as a percentage of the current price. A stock with a current market value of $40 a share paying

dividends at the rate of $3.20 is said to return 8% ($3.20$40.00). The current yield on a bond is figured the same way. Yield to maturity The yield of a bond to maturity takes into account the price discount from or premium over the face amount. It is greater than the current yield when the bond is selling at a discount and less than the current yield when the bond is selling at a premium. Zero coupon bond A bond that pays no interest but is priced, at issue, at a discount from its redemption price.

Glossary of Cost Accounting Terms Activity - The actual work task or step performed in producing and delivering products and services. An aggregation of actions performed within an organization that is useful for purposes of activity-based costing. Activity Analysis - The identification and description of activities in an organization. Activity analysis involves determining what activities are done within a department, how many people perform the activities, how much time they spend performing the activities, what resources are required to perform the activities, what operational data best reflect the performance of the activities, and what customer value the activity has for the organization. Activity analysis is accomplished with interviews, questionnaires, observation, and review of physical records ofwork. It is the foundation for agency process value analysis, which is key to overall review of program delivery. Activity-Based Costing - A cost accounting method that measures the cost and performance of process related activities and cost objects. It assigns cost to cost objects, such as products or customers, based on their use of activities. It recognizes the causal relationship of cost drivers to activities. Actual Cost - An amount determined on the basis of cost incurred including standard cost properly adjusted for applicable variance. Avoidable Cost - A cost associated with an activity that would not be incurred if the activity were not performed. Common Cost - The cost of resources employed jointly in the production of two or more outputs and the cost cannot be directly traced to any one of those outputs. Controllable Cost - A cost that can be influenced by the action of the responsible manager. The term always refers to a specified manager since all costs are controllable by someone. Cost - The monetary value of resources used or sacrificed or liabilities incurred to achieve an Objective, such as to acquire or produce a good or to perform an activity or service. Cost Allocation - A method of assigning costs to activities, outputs, or other cost objects. The allocation base used to assign a cost to objects is not necessarily the cause of the cost. For example, assigning the cost of power to machine activities by machine hours is an allocation because machine hours are an indirect measure of power consumption. Cost Assignment - A process that identifies costs with activities, outputs, or other cost objects. In a broad sense, costs can be assigned to processes, activities, organizational divisions, products, and services. There are three methods of cost assignment: (a) directly tracing costs

wherever economically feasible, (b) cause-and-effect, and (c) allocating costs on a reasonable and consistent basis. Cost Driver - Any factor that causes a change in the cost of an activity or output. For example, the quality of parts received by an activity, or the degree of complexity of tax returns to be reviewed by the IRS. Cost Finding - Cost finding techniques produce cost data by analytical or sampling methods. Cost finding techniques are appropriate for certain kinds of costs, such as indirect costs, items with costs below set thresholds within programs, or for some programs in their entirety. Cost finding techniques support the overall managerial cost accounting process and can represent non-recurring analysis of specific costs. Differential Cost - The cost difference expected if one course of action is adopted instead of others. Direct Cost - The cost of resources directly consumed by an activity. Direct costs are assigned to activities by direct tracing of units of resources consumed by individual activities. A cost that is specifically identified with a single cost object. Estimated Cost - The process of projecting a future result in terms of cost, based on information available at the time. Estimated costs, rather than actual costs, are sometimes the basis for credits to work-in-process accounts and debits to finished goods inventory. Expense - Outflow or other using up of resources or incurring liabilities (or a combination of both), the benefits from which apply to an entity's operations for the current accounting period, but do not extend to future periods. Fixed Cost - A cost that does not vary in the short term with the volume of activity. Fixed cost information is useful for cost savings by adjusting existing capacity, or by eliminating idle facilities. Also called Non-Variable Cost or Constant Cost. Full-Absorption Costing - A method of costing that assigns (absorbs) all labor, material, and service/manufacturing facilities and support costs to products or other cost objects. The costs assigned include those that do and do not vary with the level of activity performed. Full Cost - The sum of all costs required by a cost object including the costs of activities performed by other entities regardless of funding sources. Incremental Cost - The increase or decrease in total costs that would result from a decision to increase or decrease output level, to add a service or task, or to change any portion of operations. This information helps in making decisions such as to contract work out, undertake a project, or increase, decrease, modify, or eliminate an activity or product.

Indirect Cost - A cost that cannot be identified specifically with or traced to a given cost object in an economically feasible way. Job Order Costing - A method of cost accounting that accumulates costs for individual jobs or lots. A job may be a service or manufactured item, such as the repair of equipment or the treatment of a patient in a hospital. Managerial Cost Accounting System - The organization and procedures, whether automated or not, and whether part of the general ledger or stand-alone, that accumulates and reports consistent and reliable cost information and performance data from various agency feeder systems. The accumulated and reported data enable management and other interested parties to measure and make decisions about the agency's/segment's ability to improve operations, safeguard assets, control its resources, and determine if mission objectives are being met. Outcome - The results of a program activity compared to its intended purposes. Program results may be evaluated in terms of service or product quantity and quality, customer satisfaction, and effectiveness. Outputs - Any product or service generated from the consumption of resources. It can include information or paper work generated by the completion of the tasks of an activity. Performance Measurement - A means of evaluating efficiency, effectiveness, and results. A balanced performance measurement scorecard includes financial and nonfinancial measures focusing on quality, cycle time, and cost. Performance measurement should include program accomplishments in terms of outputs (quantity of products or services provided, e.g., how many items efficiently produced?) and outcomes (results of providing outputs, e.g., are outputs effectively meeting intended agency mission objectives?). Process - The organized method of converting inputs (people, equipment, methods, materials, and environment), to outputs (products or services). The natural aggregation of work activities and tasks performed for program delivery. Process Costing - A method of cost accounting that first collects costs by processes and then allocates the total costs of each process equally to each unit of output flowing through it during an accounting period. Process Value Analysis - Tools and techniques for studying processes through customer value analysis. Its objective is to identify opportunities for lasting improvement in the performance of an organization. It provides an in-depth review of work activities and tasks, through activity analysis, which aggregate to form processes for agency program delivery. In addition to activity-based costing, quality and cycle time factors are studied for a complete analysis of performance measurement. Each activity within the process is analyzed, including whether or not the activity adds value for the customer.

Product - Any discrete, traceable, or measurable good or service provided to a customer. Often goods are referred to as tangible products, and services are referred to as intangible products. A good or service is the product of a process resulting from the consumption of resources. Responsibility Center - An organizational unit headed by a manager or a group of managers who are responsible for its activities. Responsibility centers can be measured as revenue centers (accountable for revenue/sales only), cost centers (accountable for costs/expenses only), profit centers (accountable for revenues and costs), or investment centers (accountable for investments, revenues, and costs). Responsibility Segment - A significant organizational, operational, functional, or process component which has the following characteristics: (a) its manager reports to the entity's top management; (b) it is responsible for carrying out a mission, performing a line of activities or services, or producing one or a group of products; and (c) for financial reporting and cost management purposes, its resources and results of operations can be clearly distinguished, physically and operationally, from those of other segments of the entity. Service - An intangible product or task rendered directly to a customer. Standard Costing - A costing method that attaches costs to cost objects based on reasonable estimates or cost studies and by means of budgeted rates rather than according to actual costs incurred. The anticipated cost of producing a unit of output. A predetermined cost to be assigned to products produced. Standard cost implies a norm, or what costs should be. Standard costing may be based on either absorption or direct costing principles, and may apply either to all or some cost elements. Uncontrollable Cost - The cost over which a responsible manager has no influence. Unit Cost - The cost of a selected unit of a good or service. Examples include dollar cost per ton, machine hour, labor hour, or department hour. Value-Added Activity - An activity that is judged to contribute to customer value or satisfy an organizational need. The attribute "value-added" reflects a belief that the activity cannot beeliminated without reducing the quantity, responsiveness, or quality of output required by acustomer or organization. Value-added activities should physically change the product orservice in a manner that meets customer expectations. Variable Cost - A cost that varies with changes in the level of an activity, when other factors are held constant. The cost of material handling to an activity, for example, varies according to the number of material deliveries and pickups to and from that activity. Variance - The amount, rate, extent, or degree of change, or the divergence from a desired characteristic or state

Absorption costing A costing method that includes all manufacturing costs direct materials, direct labor and both variable and fixed manufacturing overhead in the cost of a unit of product. Absorption costing is also referred to as the full cost method Activity cost pool A bucket in which costs are accumulated that relate to a single activity in the activity-based costing system Annuity A series or stream of identical cash flows Appraisal costs Costs that are incurred to identify defective products before the products are shipped to customers Avoidable cost Any cost that can be eliminated (in whole or in part) by choosing one alternative over another in a decision-making situation. In managerial accounting, this term is synonymous with relevant cost and differential cost Balanced scorecard An integrated set of performance measures that is derived from and supports the organizations strategy Benchmarking Making comparisons against best practice in other organizations Capital budgeting The process of planning significant outlays on projects that have long-term implications such as the purchase of new equipment or the introduction of a new product Committed fixed costs Those fixed costs that are difficult to adjust and that relate to the investment in facilities, equipment, and the basic organizational structure of a firm Common costs A common cost is a cost that is common to a number of costing objects but cannot be traced to them individually. For example, the wage cost of the pilot of a 747 airliner is a common cost of all of the passengers on the aircraft. Without the pilot, there would be no flight and no passengers. But no part of the pilots wage is caused by any one passenger taking the flight Common fixed cost A fixed cost that supports more than one business segment, but is not traceable in whole or in part to any one of the business segments Compound interest the process of paying interest on interest in an investment Continuous or perpetual budget A 12-month budget that rolls forward one month as the current month is completed Contribution margin The amount remaining from sales revenues after all variable expenses have been deducted

Contribution margin method A method of computing the break-even point in which the fixed expenses are divided by the contribution margin per unit Contribution margin ratio (CM ratio) The contribution margin as a percentage of total sales Cost center A business segment whose manager has control over cost but has no control over revenue or the use of investment funds Cost driver A factor, such as machine-hours, beds occupied, computer time, or flight-hours, that causes overhead costs Cost of capital The overall cost to an organization of obtaining investment funds, including the cost of both debt sources and equity sources Cost of goods manufactured The manufacturing costs associated with the goods that were finished during the period Costvolumeprofit (CVP) graph The relations between revenues, costs, and level of activity in an organization presented in graphic form Decentralization The delegation of decision-making authority throughout an organization by providing managers at various operating levels with the authority to make key decisions relating to their area of responsibility Decentralized organization An organization in which decision making is not confined to a few top executives but rather is spread throughout the organization Degree of operating leverage A measure, at a given level of sales, of how a percentage change in sales volume will affect profits. The degree of operating leverage is computed by dividing contribution margin by profit Delivery cycle time The amount of time required from receipt of an order from a customer to shipment of the completed goods Differential cost Any cost that differs between alternatives in a decision making situation. In managerial accounting, this term is synonymous with avoidable cost and relevant cost Differential revenue The difference in revenue between any two alternatives Direct cost A cost that can easily and conveniently be traced to the particular cost object under consideration Direct costing Another term for variable costing. See Variable costing

Direct labor Those factory labor costs that can easily be traced to individual units of product. Also called touch labor Direct labor budget A detailed plan showing labor requirements over some specific time period Direct materials Those materials that become an integral part of a finished product and can conveniently be traced into it Direct materials budget A detailed plan showing the amount of raw materials that must be purchased during a period to meet both production and stock needs Discretionary fixed costs Those fixed costs that arise from annual decisions by management to spend in certain fixed cost areas, such as advertising and research Diversification A strategy for reducing risk by having a number of products rather than just keeps on track Economic lot size The number of units produced in a lot, or production run, that will result in minimizing setup costs and the costs of carrying stock Economic order quantity (EOQ) The order size for materials that will result in minimizing the costs of ordering and carrying stock Economic value added (EVA) A concept similar to residual profit FIFO method A method of accounting for cost flows in a process costing system in which equivalent units and unit costs relate only to work done during the current period Financial accounting The phase of accounting concerned with providing information to stockholders, creditors and others outside the organization Finished goods Units of product that have been completed but have not yet been sold to customers Fixed cost A cost that remains constant, in total, regardless of changes in the level of activity within the relevant range. If a fixed cost is expressed on a per unit basis, it varies inversely with the level of activity Flexible budget A budget that is designed to cover a range of activity and that can be used to develop budgeted costs at any point within that range to compare to actual costs incurred Incremental analysis An analytical approach that focuses only on those items of revenue, cost, and volume that will change as a result of a decision Incremental cost An increase in cost between two alternatives. Also see Differential cost

Indirect cost A cost that cannot easily and conveniently be traced to the particular cost object under consideration (p. 37). Indirect labor The labor costs of caretakers, supervisors, materials handlers, and other factory workers that cannot conveniently be traced directly to particular products Indirect materials Small items of material such as glue and nails. These items may become an integral part of a finished product but are traceable to the product only at great cost or inconvenience Internal rate of return The discount rate at which the net present value of an investment project is zero; thus, the internal rate of return represents the interest yield promised by a project over its useful life. This term is synonymous with time adjusted rate of return Investment centre A business segment whose manager has control over cost and over revenue and that also has control over the use of investment funds ISO 9000 standards Quality control requirements issued by the International Standards Organization that relate to products sold in European countries Job cost sheet A form prepared for each job that records the materials, labor and overhead costs charged to the job Joborder costing system A costing system used in situations where many different products, jobs, or services are produced each period Joint product costs Costs that are incurred up to the split-off point in producing joint products Joint products Two or more items that are produced from a common input Just-in-time (JIT) A production and stock control system in which materials are purchased and units are produced only as needed to meet actual customer demand Lead time The interval between the time that an order is placed and the time that the order is finally received from the supplier Management accounting The phase of accounting concerned with providing information to managers for use in planning and controlling operations and indecision making Management control A broad concept that incorporates traditional management accounting practices such as budgeting as well as more recent developments in performance management

Manufacturing overhead All costs associated with manufacturing except direct materials and direct labor Manufacturing overhead budget A detailed plan showing the production costs, other than direct materials and direct labor, that will be incurred over a specified time period Margin Net operating profit divided by sales Margin of safety The excess of budgeted (or actual) sales over the break-even volume of sales Marginal costing Another term for variable costing. See Variable costing Master budget A summary of a companys plans in which specific targets are set for sales, production, distribution, and financing activities and that generally culminates in a cash budget, budgeted profit and loss account, and budgeted balance sheet Mixed cost A cost that contains both variable and fixed cost elements Net operating profit Profit before interest and profit taxes have been deducted Net present value The difference between the present value of the cash inflows and the present value of the cash outflows associated with an investment project Operating assets Cash, debtors, inventory, plant and equipment, and all other assets held for productive use in an organization Operating leverage A measure of how sensitive profit is to a given percentage change in sales. It is computed by dividing the contribution margin by profit Operation costing A hybrid costing system used when products are manufactured in batches and when the products have some common characteristics and some individual characteristics. This system handles materials the same as in joborder costing and labor and overhead the same as in process costing

Payback period The length of time that it takes for a project to recover its initial cost out of the cash receipts that it generates Price elasticity of demand A measure of the degree to which the volume of unit sales for a product or service is affected by a change in price Prime cost Direct materials cost plus direct labor cost.

Process costing A costing method used in situations where essentially homogeneous products are produced on a continuous basis Process costing system A costing system used in those manufacturing situations where a single, homogeneous product (such as cement or flour) is produced for long periods of time Product differentiation Aims to maintain a price premium based on superior product quality Production budget A detailed plan showing the number of units that must be produced during a period in order to meet both sales and stock needs Production report A report that summarizes all activity in a departments Work in Process account during a period and that contains three parts: a quantity schedule and computation of equivalent units, a computation of total and unit costs, and a cost reconciliation Profit Centre A business segment whose manager has control over cost and revenue but has no control over the use of investment funds Relevant cost A cost that differs between alternatives in a particular decision. In managerial accounting, this term is synonymous with avoidable cost and differential cost Reorder point The point in time when an order must be placed to replenish depleted stocks is determined by multiplying the lead time by the average daily or weekly usage Required rate of return The minimum rate of return that an investment project must yield to be acceptable Residual income The net operating profit that an investment Centre earns above the required return on its operating assets Responsibility accounting A system of accountability in which managers are held responsible for those items of revenue and cost and only those items over which the manager can exert significant control. The managers are held responsible for differences between budgeted and actual results Responsibility Centre Any business segment whose manager has control over cost, revenue, or the use of investment funds Return on investment (ROI) Net operating profit divided by average operating assets. It also equals margin multiplied by turnover. Risk Formally, this is a situation when it is possible to attach some probability to outcomes Sales budget A detailed schedule showing the expected sales for coming

periods; these sales are typically expressed in both pounds and units Setup costs Cost involved in getting facilities ready to change over from making one product to another Shadow prices Defined as the increase in value that would be created by having one additional unit of a limiting resource Static budget A budget designed for only one level of activity Sunk cost Any cost that has already been incurred and that cannot be changed by any decision made now or in the future Supply chain management An extension of the make-or-buy decision which takes a strategic perspective Target costing The process of determining the maximum allowable cost for a new product and then developing a prototype that can be profitably manufactured and distributed for that maximum target cost figure Throughput accounting (TA) Ranking products by calculating the throughput accounting ratio Throughput accounting ratio Return per factory hour divided by cost per factory hour (p. 791). Throughput time / cycle time The time required to make a completed unit of product starting with raw materials (also known as cycle time) Total quality management (TQM) An approach to continuous improvement that focuses on customers and using teams of front-line workers to systematically identify and solve problems Traceable fixed cost A fixed cost that is incurred because of the existence of a particular business segment Transfer price The price charged when one division or segment provides goods or services to another division or segment of an organization Transferred-in cost The cost attached to products that have been received from a prior processing department Turnover The amount of sales generated in an investment center for each pound invested in operating assets. It is computed by dividing sales by the average operating assets figure (p. 610). Uncertainty Situations where it is not possible to attach probabilities to outcomes

Value chain The major business functions that add value to a companys products and services. These functions consist of research and development, product design, manufacturing, marketing, distribution, and customer service Value engineering/value analysis A technique for guiding product design through the analysis of the ratio of functionality to cost Variable cost A cost that varies, in total, in direct proportion to changes in the level of activity. A variable cost is constant per unit Variable costing A costing method that includes only variable manufacturing costs direct materials, direct labour, and variable manufacturing overhead in the cost of a unit of product. Also see Marginal costing or Direct costing Variable overhead efficiency variance The difference between the actual activity (direct labour-hours, machine-hours, or some other base) of a period and the standard activity allowed, multiplied by the variable part of the predetermined overhead rate Variance The difference between standard prices and quantities on the one hand and actual prices and quantities on the other hand Vertical integration The involvement by a company in more than one of the steps from production of basic raw materials to the manufacture and distribution of a finished product Work in process Units of product that are only partially complete and will require further work before they are ready for sale to a customer Working capital The excess of current assets over current liabilities Zero-based budget A method of budgeting in which managers are required to justify all costs as if the programs involved were being proposed for the first time

Accrual basis of accounting The basis of accounting in which revenue is recorded when earned and expenditures are recorded when obligated, regardless of when the cash is received or paid. Revenue Revenue which, as it is earned, is reserved and appropriated for a specific purpose. An example is student fees received by state colleges that are by law appropriated for the support of the colleges. The revenue does not become available for expenditure until it is earned. Appropriation Authorization for a specific agency to make expenditures or incur liabilities from a specific fund for a specific purpose. It is usually limited in amount and period of time during which the expenditure is to be incurred. For example, appropriations made by the Budget Act are available for encumbrance for one year, unless otherwise specified. Appropriations made by other legislation are available for encumbrance for three years, unless otherwise specified, and appropriations stating without regard to fiscal year shall be available from year to year until expended. Legislation or the California Constitution can provide continuous appropriations, and the voters can also make appropriations. An appropriation shall be available for encumbrance during the period specified therein, or if not specified, for a period of three years after the date upon which it first became available for encumbrance. Except for federal funds, liquidation of encumbrances must be within two years of the expiration date of the period of availability for encumbrance, at which time the undisbursed (i.e., unliquidated ) balance Audit Typically a review of financial statements or performance activity (such as of an agency or program) to determine conformity or compliance with applicable laws, regulations, and/or standards. The state has three central organizations that perform audits of state agencies: the State Controllers Office, the Department of Finance, and the Bureau of State Audits. Many state departments also have internal audit units to review their internal functions and program activities. Budget A plan of operation expressed in terms of financial or other resource requirements for a specific period of time. Budget Cycle The period of time, usually one year, required to prepare a state financial plan and enact that portion of it applying to the budget year. Significant events in the cycle include: preparation of the Governor's proposed budget (mostly done between July 1st and January 10) submission of the Governor's Budget and Budget Bill to the Legislature (by January 10) submission to the Legislature of proposed adjustments to the Governors Budget o Cash Flow Statement A statement of cash receipts and disbursements for a specified period of time. Amounts recorded as accruals, which do not affect cash, are not reflected in this statement

Fiscal Year (FY) A 12-month period during which income is earned and received, obligations are incurred, encumbrances are made, appropriations are expended, and for which other fiscal transactions are recorded. In California state government, the fiscal year begins July 1 and ends the following June 30.If reference is made to the states FY 2008 , this is the time period beginning July 1, 2008 and ending June 30, 2009. Overhead Those elements of cost necessary in the production of an article or the performance of a service thatare of such a nature that the amount applicable to the product or service cannot be determined directly. Usually they relate to those costs that do not become an integral part of the finished product or service, such as rent, heat, light, supplies, management, or supervision. Overhead Unit An organizational unit that benefits the production of an article or a service but that cannot be directly associated with an article or service to distribute all of its expenditures to elements and/or work authorizations. The cost of overhead units are distributed to operating units or programs within the department Performance Budget A budget wherein proposed expenditures are organized and tracked primarily by measurable performance objectives for activities or work programs. A performance budget may also incorporate other bases of expenditure classification, such as character and object, but these are given a subordinate status to activity performance Provision Language in a bill or act that imposes requirements or constraints upon actions or expenditures of the state. Provisions are often used to constrain the expenditure of appropriations but may also be used to provide additional or exceptional authority. (Exceptional authority usually begins with the phrase "notwithstanding...".)e. Reimbursements An amount received as a payment for the cost of services performed, or of other expenditures made for, or on behalf of, another entity (e.g., one department reimbursing another for administrative work performed on its behalf). Reimbursements represent the recovery of expenditure. Reimbursements are available for expenditure up to the budgeted amount (scheduled in an appropriation), and a budget revision must be prepared and approved by the Department of Finance before any reimbursements in excess of the budgeted amount can be expended. (SAM 6463) Sinking Fund A fund or account in which money is deposited at regular intervals to provide for the retirement of bonded debt. Sponsor An individual, group, or organization that initiates or brings to a Legislator's attention a proposed law change.

Balanced scorecard Links performance measures for key goals in customer perspective, financial perspective, internal business perspective and learning and growth perspective. Budget A detailed plan which sets out, in money terms, the plans for income and expenditure in respect of a future period of time. It is prepared in advance of that time period and is based on the agreed objectives for that period of time, together with the strategy planned to achieve those objectives. Capital budgeting A process of management accounting which assists management decision making by providing information on the investment in a project and the benefits to be obtained from that project, and by monitoring the performance of the project subsequent to its implementation. Capital expenditure Spending on resources which bring a long-term benefit to an organization, in generating cash flows or providing other benefits relating to the purpose of the organization. Capital investment See capital expenditure. Capital rationing There is not sufficient finance (capital) available to support all the projects proposed in an organization. Contingency theory An explanation that management accounting methods have developed in a variety of ways depending on the judgments or decisions required. Cost of capital The cost to the business of raising new finance. Cost-plus pricing Setting a price based on full cost of production plus desired profit. Also called full cost pricing. Cost pool The costs collected that relate to each activity. Cost An amount of expenditure on a defined activity. The word 'cost' needs other words added to it, to give it a specific meaning. Costvolumeprofit analysis Emphasizes the relationship between sales revenue, costs and profit in the short term. Debtors Persons or organizations who owe money to the entity. Depreciable amount The cost of an asset, or another amount such as replacement cost substituted for cost, less its residual value. Entity An identifiable organization for which accounting information is needed (e.g. limited liability company, public sector body). Also a legal/economic unit which exists independently of its owners.

Facility-sustaining activity (in ABC) Activity that is not driven by making products. Favorable variance This arises when the actual cost is less than the standard cost. Feed forward control Means making predictions of outputs expected at some future time and then quantifying those predictions, in management accounting terms. Feedback control Involves comparing outputs achieved against outputs desired and taking corrective action if necessary. Financial accounting A term usually applied to external reporting by a business where that reporting is presented in financial terms. Financial statements Documents containing accounting information presented to meet the needs of users. Fixed asset An asset that is held by an enterprise for use in the production or supply of goods or services, for rental to others, or for administrative purposes on a continuing Impairment An asset is impaired when the business cannot expect to recover the carrying value of the intangible asset (as shown in the balance sheet), either through using it or through selling it. Incremental budget Prepared by adding a percentage to the budget of the previous year, usually to represent the effects of inflation. Incremental costs The additional costs that arise from an activity of the organisation. To justify incurring incremental costs it is necessary to show they are exceeded by incremental revenue. Incremental revenue The additional revenue that arises from an activity of the organisation. To justify accepting incremental revenue it is necessary to show it exceeds incremental costs. Indirect cost Cost that is spread over a number of identifiable units of the business, such as products or services or departments, for which costs are to be determined. Indirect labour Labour costs that cannot be allocated directly to an identifiable unit for which costs are to be determined. Indirect materials Materials costs that cannot be allocated directly to an identifiable unit for which costs are to be determined. Integrated system Accounting records that serve the needs of both financial accounting and management accounting. Internal rate of return The discount rate at which the present value of the cash flows generated by the

product is equal to the present value of the capital invested, so that the net present value of the project is zero. Internal reporting Reporting financial information to those users inside a business, at various levels of management, at a level of detail appropriate to the recipient. Investment Centre A unit of the organization in respect of which a manager is responsible for capital investment decisions as well as revenue and costs. Invoice A document sent by a supplier to a customer showing the quantity and price of goods or services supplied. Job cost The cost of a product or service provided to a customer, consisting of direct and indirect costs of production. See also product cost. Job cost record Shows the costs of materials, labor and overhead incurred on a particular job. Job-costing system A system of cost accumulation where there is an identifiable activity for which costs may be collected. The activity is usually specified in terms of a job of work or a group of tasks contributing to a stage in the production or service process. Just-in-time purchasing is a system of contracts with suppliers to deliver goods as closely as possible to the time when they are required for operations. Just-in-time theory can be applied to manufacturing, management systems, etc. liquidity The extent to which a business has access to cash or items which can readily be exchanged for cash. Management control system A system of organizational information-seeking and gathering, accountability and feedback designed to ensure that the enterprise adapts to changes in its substantive environment and that the work behavior of its employees is measured by reference to a set of operational sub-goals so that the discrepancy between the two can be reconciled and corrected for. Margin Frequently used as a short description of profit, particularly in the financial press. May be expressed as a percentage of sales or percentage of revenue. Margin of safety The difference between the breakeven sales and the normal level of sales (measured in units or in s of sales). Master budget Combination of budgeted profit and loss account, cash flow statement and balance sheet, created from detailed budgets brought together within a finance plan. Net present value The net present value (of a project) is equal to the present value of the cash inflows

minus the present value of the cash outflows, all discounted at the cost of capital. Non-controllable cost One which is not capable of being regulated by a manager within a defined boundary of responsibility, although it may be a cost incurred so that the responsibility may be exercised. Non-financial performance measures Measurement of performance using targets that are not available in the financial reporting system. Normal level of activity Estimated by management, taking into account the budgeted level of activity in recent periods, the activity achieved in recent periods, and the expected output from normal working conditions. Operational budgets Budgets representing the quantification of operational planning, including materials and labour budgets. Opportunity cost A measure of the benefit sacrificed when one course of action is chosen in preference to another. The measure of sacrifice is related to the best rejected course of action. Overhead cost Cost that cannot be identified directly with products or services. See also indirect costs. Overhead cost rate Overhead cost divided by a measure of activity such as production to give a cost per unit of activity. Ownership interest The residual amount found by deducting all of the entity's liabilities from all of the entity's assets. Present value A sum of 1 receivable at the end of n years when the rate of interest is r% per annum equals where r represents the annual rate of interest, expressed in decimal form, and n represents the time period when the cash flow will be received. Prime cost of production Equal to the total of direct materials, direct labour and other direct costs. Product cost Cost associated with goods or services purchased, or produced, for sale to customers. See also job cost. Product differentiation The business may be able to charge a higher price (a premium) for the reputation or quality of its product. Product life cycle The sequence of development of a product from initial development through maturity of sales to eventual decline in sales. Profit The increase in the ownership interest in an entity over a specified period of time, due to the activities of the entity. The word 'profit' needs other words added to it, to give it a specific meaning.

. Relevant costs Those future costs which will be affected by a decision to be taken. Non-relevant costs will not be affected by the decision. Relevant revenues Those future revenues which will be affected by a decision to be taken. Non-relevant revenues will not be affected by the decision. Re-order level The point at which the buying department places its order for replacement materials. Reporting period The period in respect of which the accounting information is prepared. In management accounting the period may be as frequent as the management chooses weekly, monthly, quarterly and annual reporting are all used. Residual value The estimated amount that an entity would currently obtain from disposal of an asset, after deducting the estimated costs of disposal, if the asset were already of the age and condition expected at the end of its useful life. Responsibility Centre An area of responsibility which is controlled by an individual. It might be a cost centre, a profit centre or an investment centre. Revenue Is created by a transaction or event arising during the ordinary activities of the business which causes an increase in the ownership interest. Sales budget Budget of sales volumes and prices for a future period. Scrap Unwanted material sold for disposal, usually at a very low price in relation to its original cost. Semi-variable cost One which is partly fixed and partly varies with changes in the level of activity, over a defined period of time. Sensitivity analysis Asks 'what . . . if' questions such as 'What will be the change in profit if the selling price decreases by 1%?' or 'What will be the change in profit if the cost increases by 1%?' Short-term finance Money lent to a business for a short period of time, usually repayable on demand and also repayable at the choice of the business if surplus to requirements. Standard cost Target cost which should be attained under specified operating conditions. Expressed in cost per unit. Standard hour The amount of work achievable, at standard efficiency levels, in one hour. Statement (from supplier). A document sent by a supplier to a customer at the end of each month

summarizing all invoices awaiting payment by the customer. Step cost A fixed cost which increases in steps over a period of several years. Strategic management accounting The provision and analysis of financial information on the firm's product markets and competitors' costs and cost structures and the monitoring of the enterprise's strategies and those of its competitors in these markets over a number of periods. Strategic planning Involves preparing, evaluating and selecting strategies to achieve objectives of a longterm plan of action. Strategy A plan setting out the actions and resources needed to achieve a stated objective of the longterm plan. Time value of money The name given to the idea that 1 invested today will grow with interest rates over time (e.g. 1 become 1.10 in one year's time at a rate of 10%). Top-down budget Set by management without inviting those who will implement the budget to participate in the process of setting the budget. Also called an imposed budget. Total cost Calculated as variable cost plus fixed cost; or direct cost plus indirect cost; or product cost plus period cost. Total product cost Comprises prime cost plus production overhead cost. Unavoidable cost A cost that is not eliminated by taking a particular action. Unit cost The cost of one unit of output. Value chain A way of describing and analyzing the sequence of activities that bring on product/service from initial stage of production to final stage of delivery. Variable cost One which varies directly with changes in the level of output, over a defined period of time. Variable costing Only variable costs of production are absorbed into products and the unsold inventory is valued at variable cost of production. Fixed costs of production are treated as a cost of the period in which they are incurred. Variance The difference between a planned, budgeted or standard cost and the actual cost incurred. An adverse variance arises when the actual cost is greater than the standard cost. A favourable variance arises when the actual cost is less than the standard cost. Variance analysis Quantitative breakdown of cost variance into main causes, e.g. price and usage.

Working capital Finance provided to support the short-term assets of the business (inventory and debtors) to the extent that these are not financed by short-term creditors. It is calculated as current assets minus current liabilities. Work-in-progress A product or service that is partly completed.

Glossary of Economic Terms Absolute poverty Absolute poverty measures the number of people living below a certain income threshold or the number of households unable to afford certain basic goods and services. Allocative efficiency Allocative efficiency occurs when the value that consumers place on a good or service (reflected in the price they are willing and able to pay) equals the cost of the resources used up in production. The technical condition required for allocative efficiency is that price = marginal cost. When this happens, total economic welfare is maximized. Anti-competitive behavior Anti-competitive practices are strategies operated by firms that are deliberately designed to limit the degree of competition in a market. Such actions can be taken by one firm in isolation or a number of firms engaged in some form of explicit or implicit collusion. Where firms are found to be colluding it would be seen to be against the public interest) Black market A black market (or shadow market) is an illegal market in which the normal market price is higher than a legally imposed price ceiling (or maximum price). Black markets develop where there is excess demand (or a shortage) for a commodity. Some consumers are prepared to pay higher prices in black markets in order to get the goods or services they want. When there is a shortage, higher prices act as a rationing device. Good examples of black markets include tickets for major sporting events, rock concerts and black markets for children's toys and designer products that are in scarce supply. Brand A distinctive product offering which is created by the use of a logo, symbol, name, design, packaging or combination thereof. The key in designing and building a brand is to differentiate it from competitors Capital The term capital means investment in goods that are used to produce other goods in the future. Fixed capital includes machinery, plant and equipment, new technology, factories and buildings - all of which are capital goods designed to increase the productive potential of the economy in future years. Capital goods Producer or capital goods such as plant (factories) and machinery are useful not in themselves but for the goods and services they can help produce in the future. Competitive market A competitive market is one where no one firm has a dominant position and where the consumer has plenty of choice when buying goods or services. Firms in a competitive market each have a small market share. There are few barriers to the entry of new firms which allows new businesses to enter the market if they believe they can make sufficient profits Competitive supply Goods in competitive supply are alternative products a firm could make with its resources. E.g. a farmer can plant potatoes or carrots. An electronics factory can produce VCRs or DVDs. Complementary goods Two complements are said to be in joint demand. Examples include: fish and chips, DVD players and DVDs, iron ore and steel, success and hard work. A rise in the price of a complement to Good X should cause a fall in demand for X. For example an increase in the cost of flights

from London Heathrow to New York would cause a decrease in the demand for hotel rooms in New York and also a fall in the demand for taxi services both in London and New York. A fall in the price of a complement to Good Y should cause an increase in demand for Good Y. For example a reduction in the market price of computers should lead to an increase in the demand for computer peripherals such as printers, scanners and software applications. Composite Demand Composite demand exists where goods or services have more than one use so that an increase in the demand for one product leads to a fall in supply of the other. The most commonly quoted example is that of milk which can be used for cheese, yoghurts, cream, butter and other products. If more milk is used for manufacturing cheese, ceteris paribus there is less available for butter. Consumer surplus Consumer surplus is a measure of the welfare that people gain from the consumption of goods and services, or a measure of the benefits they derive from the exchange of goods. Consumer surplus is the difference between the total amount that consumers are willing and able to pay for a good or service (indicated by the demand curve) and the total amount that they actually pay (the market price). Consumption Consumption is the use of a good or a service by consumers (households) to satisfy a want or a need Corporate Social Responsibility There is growing interest in the concept of ethical businesses and corporate social responsibility where the traditional assumption of businesses driven solely by the profit motive is challenged and where businesses are encouraged to take account of their economic, social and environmental impacts. Cost benefit analysis Governments face choices: do we build new hospitals or new or new schools, etc. Given limited resources how can government decide which projects to prioritize and build and which to reject? Cost Benefit Analysis (CBA) offers a systematic framework for measuring and evaluating the likely impact of public sector project, takes into account both private and external costs and benefits over the entire life of the project. Costs Costs are those expenses faced by a business when producing a good or service for a market. Every business faces costs - these must be recouped if a business is to make a profit from its activities. In the short run a firm will have fixed and variable costs of production Cross price elasticity of demand Cross price elasticity (CPed) measures the responsiveness of demand forgood X following a change in the price of good Y (a related good). With cross price elasticity we make an important distinction between substitute products and complementary goods and services Demand Demand is defined as the quantity of a good or service that consumers are willing and able to buy at a given price in a given time period. Each of us has an individual demand for particular goods and services. Demand curve A demand curve shows the relationship between the price of an item and the quantity demanded over a period of time. For normal goods, more of a product will be demanded as the price

falls. This is because at lower prices, consumers can afford to purchase more with their income. A fall in prices causes an increase in a consumers' real income. Secondly, a fall in price makes one good relatively cheaper than a substitute encouraging consumers to switch their demand in favour of the lower priced product. De-merit goods Merit goods are 'good' for you. In contrast, de-merit goods are thought to be 'bad' for you. Examples include alcohol, cigarettes and various drugs. The consumption of de-merit goods can lead to negative externalities which causes a fall in social welfare. The government normally seeks to reduce consumption of de-merit goods. Consumers may be unaware of the negative externalities that these goods create - they have imperfect information. Diminishing returns The Law of Diminishing Returns occurs because factors of production are not perfect substitutes for each other. Resources used in producing one type of product are not necessarily as efficient when switched to the production of another good or service. The law of diminishing returns lies at the heart of conventional production and cost theory. Diseconomies of scale There are nearly always limits to the potential to achieve economies of scale. Indeed when a business expands beyond a certain size, average costs per unit may start to increase. This is known as diseconomies of scale. Diseconomies of scale arise mainly through problems of management. As a firm grows, management finds it more difficult to organize production efficiently. It is much easier to lose control of costs in a large organization than in a small business. Division of Labor Division of labor means the specialization of the functions and roles involved in making the separate parts of a product. It is closely tied to the standardization of production, the introduction and perfection of machinery, and the development of large-scale industry. As a result of mass-production techniques, total production is many times what it would be had each worker made the complete product. Problems created by the division of labor include job monotony, technological unemployment, and eventually chronic unemployment if the economy does not expand quickly enough to reabsorb the displaced labor. Economies of scale Economies of scale are of huge importance to many businesses - not least those that have to compete in international markets where cost competitiveness is vital. Both producers and consumers stand to gain from economies of scale. Businesses can bring down their average costs by producing on a larger scale. This opens up the possibility of them making bigger profit margins and also building a competitive advantage in their chosen markets. For consumers, lower costs per unit can be translated into a reduction in market prices which leads to a rise in their real purchasing power and a potential improvement in economic welfare (e.g. measured by the level of consumer surplus). Effective demand Demand in economics must be effective. Only when a consumers' desire to buy a product is backed up by an ability to pay for it do we speak of demand. For example, many people would be willing to buy a luxury sports car, but their demand would not be effective if they did not have the financial means to do so. They must have sufficient real purchasing power. Entrepreneur An entrepreneur is an individual who seeks to supply products to a market for a rate of

return (i.e. a profit). Entrepreneurs will usually invest their own financial capital in a business and take on the risks associated with a business investment. The reward to this risk-taking is the profit made from running the business. Many economists agree that entrepreneurs should be classed as specialised part of the factor input 'labour'. Entry barriers For a high level of profits to be maintained in the long run, a monopolist must successfully prevent the entry of new suppliers into a market. Barriers to entry are the mechanisms by which potential competitors are blocked. Monopolies can then enjoy higher profits in the long run as rivals have not diluted market share. Equilibrium Equilibrium means at rest or a state of balance - i.e. a situation where there is no tendency for change External costs External costs are those costs faced by a third party for which no appropriate compensation is forthcoming. Identifying and then estimating a monetary value for air pollution is a difficult exercise - but one that is increasingly important for economists concerned with the impact of economic activity on our environment. External economies of scale External economies arise from the growing size of an industry. As the industry grows in size and there are more firms in the industry, these companies may enjoy lower average total costs for several reasons: Firms will be able to draw on a pool of skilled labour, trained by firms and government, thus reducing their own training and living costs. Externalities Externalities are third party effects arising from production and consumption of goods and services for which no appropriate compensation is paid. Externalities occur in nearly every market and industry and can cause market failure if the price mechanism does not take into account the full social costs and benefits of production and consumption. Externalities occur outside of the market i.e. they affect economic agents not directly involved in the production and/or consumption of a particular good or service Factor immobility Factor immobility occurs when a factor is unable to switch easily between different sectors of the economy Financial economies Small firms often have to pay higher interest rates on loans since they are perceived by financial organizations to carry a higher level of risk. Firms therefore have to pay a risk premium on their loans. The smaller firm may find it more difficult to raise money through selling new shares than a larger firm. Finite resources There are only a finite number of workers, machines, acres of land and reserves of oil and other natural resources on the earth. Because resources are finite, we cannot produce an infinite number of goods and services. By producing more for an ever-increasing population, we are in danger of destroying the natural resources of the planet. This will have serious consequences for the long-term sustainability of economies throughout the world and potentially enormous implications for our living

standards and the quality of life. Firm A firm is an organisation that uses factors of production (resources) to create goods and services e.g. public limited companies plcs Fixed costs These costs relate to the fixed factors of production and do not vary directly with the level of output. Examples of fixed costs include: rent and business rates, the depreciation in the value of capital equipment (plant and machinery) due to age and marketing and advertising costs Franchises Franchises and licences give a firm the right to operate in a market - and are usually open to renewal every few years. Examples include: Commercial television and radio licences, local taxi route licences and the franchise holders to run regional rail services Free goods Not all goods have an opportunity cost. Free goods are not scarce and no cost is involved when consuming them Free Market Economy In a free market economic system, governments take the view that markets work, assume a laissez faire (let alone) approach, step back, and allow the forces of supply and demand to set prices and allocate resources. Government intervention is required mainly to prevent or correct market failure through for example enforcing anti-monopoly legislation (i.e. preventing abuses of market power), enforcing private property rights, and redistributing income through the tax and benefit system etc Futures market A futures market is a commodity exchange where contracts for the future delivery of grain, livestock, and precious metals are bought and sold. Speculation in futures serves to protect both the producers and the users of the commodities from unpredictable price fluctuations. Geographical immobility People may also experience geographical immobility meaning that there are barriers to them moving from one area to another to find work Gini coefficient The Gini coefficient is a statistical measure of income distribution. A Gini coefficient of 0 means perfect equality; 1 total inequality Globalisation Globalisation is the increased worldwide integration and interdependence of those economies that trade. For example, transnational firms locate the production and assembly of goods in different locations across the world. Government failure Even with good intentions governments seldom get their policy application correct. They can tax, control and regulate but the eventual outcome may be a deepening of the market failure or even worse a new failure may arise. Government failure may range from the trivial, when intervention is merely ineffective, but where harm is restricted to the cost of resources used up and wasted by the intervention, to cases where intervention produces new and more serious problems that did not exist before. The consequences of this can take many years to reverse. Government paternalism Some economists argue that the nanny state is when the government

imposes its own preferences on consumers. For example, when the government subsidies university tuition fees and taxes cigarettes it is saying we know better than you what is good for you. Horizontal integration Where two firms join at the same stage of production in one industry. For example two car manufacturers may decide to merge, or a leading bank successfully takes-over another bank. The world's biggest contested takeover took place in 2000 when British business Vodafone mounted a successful bid for German telecoms firm Mannesmann Human capital Human capital is the stock of skills, experience and qualifications held by the labour force that can be brought into the production function. New Growth theorists believe there is a strong link between investment in human capital and long-term growth. Human resource management HRM describes improvements to procedures involving recruitment, training, promotion, retention and support of faculty and staff. This becomes critical to a business when the skilled workers it needs are in short supply. Recruitment and retention of the most productive and effective employees makes a sizeable difference to corporate performance in the long run (as does the flexibility to fire those at the opposite extreme!) Imperfect information Consumers and producers require complete information if they are to make efficient choices. In perfectly competitive markets we assume that all agents in the market have perfect information about the availability of goods and services and also the prices charged by suppliers. Consumers can make purchasing decisions on the basis of full and free information on the products that they are buying. In reality, all of us experience information deficits which can lead to a misallocation of resources. Information failure occurs when people have inaccurate, incomplete, uncertain or misunderstood data and so make potentially wrong choices. Consumers can never be expected to have a full-informed view about the products they are faced with in each and every market. Searching for information is time consuming and carries an obvious opportunity cost. Likewise, producers do not have full information about the products and prices being charged by their competitors. Incentives Incentives matter enormously in our study of microeconomics, markets and market failure. For competitive markets to work efficiently economic agents (i.e. consumers and producers) must respond to appropriate price signals in the market. Government intervention in markets can often change the incentives that both producers and consumers face - for example a change in relative prices brought about by the introduction of government subsidies and taxation. Income Income represents a flow of earnings from using factors of production to generate an output of goods and services Income effect Income effects refer to changes in the real purchasing power of consumers. For example when the average price level falls, a given amount of money income can now buy more goods and services. Consumer demand for normal goods will increase, but decrease for inferior goods. Changes in real price levels affect the real incomes of households and firms. Income elasticity of demand Income elasticity of demand measures the relationship between a change in

quantity demanded and a change in real income. The formula for income elasticity is: percentage change in quantity demanded divided by the percentage change in income Indirect tax An indirect tax is imposed on producers (suppliers) by the government. Examples include excise duties on cigarettes, alcohol and fuel and also value added tax. Taxes are levied by the government for a number of reasons - among them as part of a strategy to curb pollution and improve the environment. A tax increases the costs of a business causing an inward shift in the supply curve. The vertical distance between the pre-tax and the post-tax supply curve shows the tax per unit. With an indirect tax, the supplier may be able to pass on some or all of this tax onto the consumer through a higher price. This is known as shifting the burden of the tax and the ability of businesses to do this depends on the price elasticity of demand and supply. Inferior goods For normal products, more is demanded as income rises, and less as income falls. Most products are like this but there are exceptions called inferior products. They are often cheaper poorer quality substitutes for some other good. Examples include black-and-white television sets, cigarettes, white bread and several other basic foods. With a higher income a consumer can switch from the cheaper substitute to the more expensive, but preferred alternative. As a result, less of the inferior product is demanded at higher levels of income. Inferior goods have a negative income elasticity of demand. Infinite wants Human beings want better food; housing; transport, education and health services. They demand the latest digital technology, more meals out at restaurants, more frequent overseas travel, better cars, cheaper food and a wider range of cosmetic health care treatments. Whilst our economic resources are limited, human needs and wants are infinite. Indeed the development of society can be described as the uncovering of new wants and needs - which producers attempt to supply by using the available factors of production. Interest elasticity of demand The change in demand for a good or service brought about by a change in interest rates. The demand for many products is sensitive to interest rate changes - notably sectors of consumer demand linked to the strength of the housing market. Goods and services bought on credit might also be expected to have a relatively high interest elasticity of demand. Internal expansion Firms can generate higher sales and increased market share by expanding their operations and exploiting possible economies of scale. The alternative is to grow externally through mergers and takeovers. See also integration of firms Invisible hand The 18th Century economist Adam Smith - one of the founding fathers of modern economics, described how the invisible or hidden hand of the market operated in a competitive market through the pursuit of self-interest to allocate resources in society's best interest. This remains the central view of all free-market economists, i.e. those who believe in the virtues of a free-market economy with minimal government intervention. Joint Supply Joint supply describes a situation where an increase or decrease in the supply of one good leads to an increase or decrease in supply of another. For example an expansion in the volume of beef production will lead to a rising market supply of beef hides. A contraction in supply of lamb will reduce

the supply of wool Knowledge-based industries Knowledge based industries are essentially service industries. Examples include communication, finance, and personal services. However hi-tech manufacturing also comes under this umbrella term. This would include pharmaceuticals, computer hardware and software industries and TV and other communication equipment. Land Land is the natural resources available for production. Some nations are endowed with natural resources and specialize in the extraction and production of these resources for example the development of the North Sea Oil and Gas in Britain and Norway. Latent demand Latent demand exists when there is willingness to purchase a good or service, but where the consumer lacks the real purchasing power to be able to afford the product. Latent demand is affected by persuasive advertising - where the producer is seeking to influence consumer tastes and preferences. Law of demand The law of demand is that there is an inverse relationship between the price of a good and demand. As prices fall we see an expansion of demand. If price rises there should be a contraction of demand. Long run The long run in economics is defined as a period of time in which all factor inputs can be changed. The firm can therefore alter the scale of production. If as a result of such an expansion, the firm experiences a fall in long run average total cost, it is experiencing economies of scale. Conversely, if average total cost rises as the firm expands, diseconomies of scale are happening. Macroeconomics Macroeconomics is more concerned with the economy as a whole. For example, how the levels of output, inflation, employment, growth, imports and exports are determined. Managerial economies A large manufacturer can employ specialist staff to supervise production, thus cutting managerial costs per unit. Greater control of the workforce should raise labour productivity. Specialist administrative equipment, like networked systems of computers, can be used profitably in large firms. The cost of transmitting business information is reduced and employees can communicate more effectively. Marginal cost Marginal cost is defined as the change in total costs resulting from increasing output by one unit. Marginal costs relate to variable costs only. Changes in fixed costs in the short run affect total costs, but not marginal costs Marginal product Marginal product (MP) = the change in total output from adding one extra unit of labour Marginal utility Marginal Utility is the change in total utility or satisfaction resulting from the consumption of one more unit of a good. The hypothesis of diminishing marginal utility states that as the quantity of a good consumed increases, the marginal utility falls

Market demand Market demand is the sum of the individual demand for a product from each consumer in the market. If more people enter the market, then demand at each price level will rise. For example, market demand for mobile phones has expanded rapidly over the last few years as call costs have fallen. Eventually though the market demand for mobile phones will reach saturation point - every product has a life-cycle. Market equilibrium Equilibrium means a state of equality between demand and supply. Without a shift in demand and/or supply there will be no change in market price. Prices where demand and supply are out of balance are termed points of disequilibrium. Changes in the conditions of demand or supply will shift the demand or supply curves. This will cause changes in the equilibrium price and quantity in the market. Market structure Markets can be characterised according to how many suppliers are seeking the demand of consumers. The spectrum of competition ranges from competitive markets where there are many sellers, each of whom has little or no control over the market price - to a pure monopoly where a market or an industry is dominated by one single supplier. In many sectors of the economy we see an oligopoly - where a just a few producers dominate the majority of the market. In a duopoly two firms dominate the market. Market supply Market supply is the total amount of an item producers are willing and able to sell at different prices, over a given period of time e.g. one month. industry, a market supply curve is the horizontal summation of all each individual firms supply curves Marketing economies A large-scale manufacturer can buy raw materials and other inputs (components) in bulk and thereby negotiate lower prices than the small manufacturer. When a major buyer in a market has substantial buying power, this is termed a monopsony. For example, the major hotel chains can buy the consumables used in hotel rooms at much lower cost than individual consumers. The motor industry can use its monopsony power when negotiating the supply of tyres, in-car entertainment systems and other component parts. The average cost of selling each unit produced can also be lower, because advertising and marketing costs can be spread over a large output sold and specialist salesmen/buyers are employed to maximize sales. Maximum price The Government can set a legally imposed maximum price in a market that suppliers cannot exceed - in an attempt to prevent the market price from rising above a certain level. To be effective a maximum price has to be set below the free market price. One example of a maximum price might be for foodstuffs when a shortage of essential foodstuffs threatens a very large rise in the free market price. Other examples include rent controls on properties - for example the complex system of rent controls still in place in Manhattan in the United States. Mergers Mergers take place when two businesses agree to merge their operations and become one single company. There are different types of integration between firms - see also horizontal and vertical integration Merit goods Merit Goods are those goods and services that the government feels that people will

under-consume, and which ought to be subsidised or provided free at the point of use. Both the public and private sector provide merit goods & services. Consumption of merit goods is widely believed to generate positive externality effects - where the social benefit from consumption exceeds the private benefit. A merit good is a product that society values and judges that everyone should have regardless of whether an individual wants them. In this sense, the government (or state) is acting paternally in providing merit goods and services. They believe that individuals may not act in their own best interests in part because of imperfect information about the benefits that can be derived. Microeconomics Microeconomics concerns itself with the study of economics and decisions taken at the level of the individual firm, industry or consumer / household. Microeconomics is also concerned with how prices are determined in markets; how much people get paid in different occupations; how we decide what to buy; the effects of government intervention on the prices and quantities of individual goods and services and the efficiency with which our scarce resources are used. Minimum price A minimum price is a legally imposed price floor below which the normal market price cannot fall. To be effective the minimum price has to be set above the normal equilibrium price. A good example of this is minimum wage legislation currently in force in the UK. The National Minimum Wage was introduced by the Labor Government in April 1999. The main adult rate for the minimum wage in the UK is 4.80 per hour. Mixed economy The price mechanism is the only allocative mechanism solving the economic problem in a free market economy. However, most modern economies are mixed economies, comprising not only a market sector, but also a non-market sector, where the government uses the planning mechanism to provide goods and services such as police, roads and health. Monopoly A pure monopolist is a single seller of a product in a given market or industry. In simple terms this means the firm has a market share of 100%. The working definition of a monopolistic market relates to any firm with greater than 25% of the industries' total sales. Monopolies can develop in a variety of ways Natural monopoly A natural monopoly exists when there is great scope for economies of scale to be exploited over a very large range of output. Indeed the scale of production that achieves productive efficiency may be a high percentage of the total market demand for the product. Natural monopolies are associated with industries where there is a high ratio of fixed to variable costs. For example, the fixed costs of establishing a national distribution network for a product might be enormous, but the marginal (variable) cost of supplying extra units of output may be very small. In this case, the average total cost will continue to decline as the scale of production increase, because fixed (or overhead) costs are being spread over higher and higher levels of output. Needs and wants Humans have many different types of wants and needs e.g.: economic, social and psychological. In economics the focus is on studying how material wants and needs are satisfied: A need is something essential for survival e.g. food satisfies hungry people. A want is something desirable but not essential to survival e.g. cola quenches thirst. Household (consumer) wants and needs are satisfied (met)

by consuming (using) products i.e. goods or services Negative externalities Negative externalities occur when production and/or consumption impose external costs on third parties outside of the market for which no appropriate compensation is paid New classical economics A branch of economics that stresses the importance of competitive markets as a way of improving economic welfare. New classical economists believe that markets clear rapidly - i.e. excess demand in a market will cause higher prices; excess supply causes a fall in prices. They believe that government economic policy should allow the free operation of markets and that intervention should be limited to allowing private sector markets to work efficiently Normal goods Normal goods have a positive income elasticity of demand so as consumers' income rises, so more is demanded at each price level. Normal necessities have an income elasticity of demand of between 0 and +1. Normal luxuries have an income elasticity of demand > +1 i.e. the demand rises more than proportionate to a change in income Normative statements Normative statements express an opinion about what ought to be. They are subjective statements rather than objective statements - i.e. they carry value judgments. For example, the level of duty on petrol is too unfair and unfairly penalizes motorists. Or the government should increase the national minimum wage to 6 per hour in order to reduce relative poverty. A third example - the UK government should join the Single European Currency as soon as possible. Occupational immobility Occupational immobility occurs when there are barriers to the mobility of factors of production between different sectors of the economy which leads to these factors remaining unemployed, or being used in ways that are not economically efficient. Some capital inputs are occupationally mobile a computer can be put to use in many different industries. Commercial buildings can be altered to provide a base for many businesses. However some units of capital are specific to the industry they have been designed for. Labor often experiences occupational immobility. For example, workers made redundant in the sheet metal industry or in heavy engineering may find it difficult to gain re-employment in the near term. They may have job-specific skills that are not necessarily needed in growing industries. This implies that there is a mismatch between the skills on offer from the unemployed and those required by employers looking for extra workers. This is also called structural unemployment and explains why there is a core of workers in the UK who find it difficult to find paid work. Clearly this leads to a waste of scarce resources and represents market failure. Oligopoly An oligopoly is a market dominated by a few large suppliers. The degree of market concentration is high with typically the leading five firms taking over sixty per cent of total market sales. Organic growth Firms can generate higher sales and increased market share by expanding their operations and exploiting possible economies of scale. This is internal rather than external growth (i.e. organic growth) and therefore tends to be a slower means of expansion contrasted to mergers and acquisitions Output quotas Sometimes producers may deliberately limit supply through output quotas. This is

designed to reduce market supply and force the price upwards. An example of this is the fishing quota introduced by the EU Commission as part of the Common Fisheries Policy. In part the quota is designed to protect fish stocks from permanent depletion. Pareto efficiency A Pareto efficient allocation of resources occurs when resources cannot be readjusted to make one consumer better off without making another worse off Patents Patents are government enforced property rights to prevent the entry of rivals. They are generally valid for 17-20 years and give the owner an exclusive right to prevent others from using patented products, inventions, or processes Positive externalities Positive externalities exist when third parties benefit from the spill-over effects of production/consumption e.g. the social returns from investment in education & training or the positive benefits from health care and medical research Positive statements Positive statements are objective statements that can be tested or rejected by referring to the available evidence. Positive economics deals with objective explanation. For example: A rise in consumer incomes will lead to a rise in the demand for new cars. Or, a fall in the exchange rate will lead to an increase in exports overseas. Or if the government decides to raise the tax (duty) on beer, this will lead to a fall in profits of the major brewers. Poverty trap The poverty trap affects people on low incomes. It creates a disincentive to look for work or work longer hours because of the effects of the tax and benefits system. For example, a worker might be given the opportunity to earn an extra 50 a week by working ten additional hours. This boost to his/her gross income is reduced by an increase in income tax and national insurance contributions. The individual may also lose some income-related state benefits. The combined effects of this might be to take away over 70% of a rise in income, leaving little in the way of extra net or disposable income.

Price elasticity of demand Price elasticity of demand measures the responsiveness of demand for a product following a change in its own price. The formula for calculating the co-efficient of elasticity of demand is: Percentage change in quantity demanded divided by percentage change in price. If the demand increased by 10% due to a fall in a good's own price of 5%, the price elasticity of demand for a product would be 2. Since changes in price and quantity nearly always move in opposite directions, economists usually do not bother to put in the minus sign. We are more concerned with the co-efficient of price elasticity of demand. Price elasticity of supply Price elasticity of supply (Pes) measures the relationship between change in quantity supplied and a change in price. When supply is elastic, producers can increase production without a rise in cost or a time delay. When supply is inelastic, firms find it hard to change their production levels in a given time period. The formula for price elasticity of supply is: Percentage change in quantity supplied divided by the Percentage change in price

Price mechanism The price mechanism is the means by which decisions of consumers and businesses interact to determine the allocation of resources between different goods and services. Primary Sector This involves extraction of natural resources e.g. agriculture, forestry, fishing, quarrying, and mining Product markets Product markets refer to markets in which all kinds of commodities are traded, for example the market for airline travel; for new cars; for pharmaceutical products and the market for financial services such as banking and occupational pensions. Production Production involves in nearly all cases, using up scarce resources. Production can take place at various levels - ranging from primary industries in which basic resources are extracted through manufacturing and construction (secondary industries) to tertiary and quaternary industries (the service sector). Production Production refers to the output of goods and services produced within a market in a given time period Production possibility frontier A production possibility frontier (PPF) or boundary shows the combinations of two or more goods and services that can be produced using all available factor resources efficiently. A PPF is normally drawn on a diagram as concave to the origin because the extra output resulting from allocating more resources to one particular good may fall. I.e. as we move down the PPF, as more resources are allocated towards Good Y, the extra output gets smaller - and more of Good X has to be given up in order to produce the extra output of Good Y. This is known as the principle of diminishing returns. Productive efficiency The output of productive efficiency occurs when a business in a given market or industry reaches the lowest point of its average cost curve. Output is being produced at minimum cost per unit implying an efficient use of scarce resources and a high level of factor productivity Profits Profits are made when total revenue exceeds total cost. Total profit = total revenue - total cost. Profit per unit supplied = price = average total cost. The standard assumption is that private sector businesses seek to make the highest profit possible from operating in a market. There are times when this assumption can be dropped - but the profit seeking firm or business remains a powerful component of standard economic analysis. Public goods The characteristics of pure public goods are the opposite of private goods: Nonexcludability: The benefits of public goods cannot be confined to only those who have paid for it. In this sense, non-payers can enjoy the benefits of consumption for no financial cost. Non-rivalry in consumption: Consumption of a public good by one person does not reduce the availability of a good to others - we all consume the same amount of public goods even though our tastes for these goods (and therefore our valuation of the benefit we derive from them) might differ Quasi-public goods A quasi-public good is a near-public good i.e. it has many but not all the

characteristics of a public good. Quasi-public goods are: (i) Semi-non-rival: up to a point extra consumers using a park, beach or road do not reduce the amount of the product available to other consumers. Eventually additional consumers reduce the benefits to other users. (ii) Semi-non-excludable: it is possible but often difficult or expensive to exclude non-paying consumers. E.g. fencing a park or beach and charging an entrance fee; building toll booths to charge for road usage on congested route Research and development Research and development spending is heaviest in those industries that require a leading edge in the development of new projects and processes. And in industries and markets where there are high level gains from acquiring patents.

Resource allocation Resource allocation refers to a given use of land, labour, capital and entrepreneurs those results in particular amounts of goods and services being produced. A reallocation of resources means some factors of production are switched from one use to another i.e. into different industries and occupations resulting in different amounts of goods and services produced. Revenue Revenue means the income firms receive from the sale of output Risk-bearing economies A large firm sells in more markets and has a wider product range than a smaller company. The rapid expansion of multi product businesses is part of a process of diversification. This helps spread business risks so that if one market does badly the company has other markets to sell into. Scarcity Scarce means limited. Our resources of land labour capital and enterprise are finite. There is only a limited amount of resources available to produce the unlimited amount of goods and services we desire Secondary Sector This involves the production of goods in the economy, i.e. transforming materials produced by the primary sector e.g. energy manufacturing and the construction industry Self-sufficiency Self-sufficiency is where people try to meet their own wants and needs without producing a surplus to trade. Short run The short run is a period of time when there is at least one fixed factor of production. This is usually the capital input such as plant and machinery and the stock of building and technology. In the short run, output expands when more variable factors (labour, raw materials and components) are employed. Specialization Self-sufficiency is where people try to meet their own wants and needs without producing a surplus to trade. Specialization is when individuals, regions or countries concentrates on making one product to create a surplus to be traded Speculative demand The demand for a product can also be affected by speculative demand in the marketplace. Here, potential buyers are interested not just in the satisfaction they may get from consuming the product, but also the potential rise in market price leading to a capital gain or profit. When prices are rising, speculative demand may grow, adding to the upward pressure on prices. The speculative

demand for housing and for shares (also known as equities) might come into this category. Stakeholders Stakeholders are groups who have an interest in the activity of a business e.g. shareholders, managers, employees, suppliers, customers, government and local communities. Different stakeholders have different objectives e.g. owners want maximum profits, customers low prices and workers high wages. Stakeholder conflict ensues. In plcs ownership and control are separate. Owners seek profits; managers may seek sales maximisation as these increase bonuses. Substitute goods Substitutes are goods in competitive demand and act as replacements for another product. For example, a rise in the price of Esso petrol (other factors held constant) should cause a substitution effect away from Esso towards competing brands. A fall in the monthly rental charges of cable companies or Vodafone mobile phones might cause a decrease in the demand for British Telecom services. Consumers will tend over time to switch to the cheaper brand or service provider. When it is easy to switch, consumer demand will be sensitive to price changes (see the section on price elasticity of demand) Substitute in production A substitute in production is a product that could have been produced using the same resources. Take the example of barley. An increase in the price of wheat makes wheat growing more attractive. The pursuit of the profit motive may cause farmers to use land to grow wheat rather than barley. Supply Supply is the quantity of a good or service that a producer is willing and able to supply onto the market at a given price in a given time period. The basic law of supply is that as the market price of a commodity rises, so producers expand their supply onto the market. Supply curve A supply curve shows a relationship between price and quantity a firm is willing and able to sell. If the price of the good varies, we move along a supply curve. A price rise will usually cause an expansion of supply. If the market price falls there would be a contraction of supply in the market. Producers are responding to price signals when making their output decisions. Tariff A tariff is a tax on the value of imports and remains the most common form of trade protection in the world economy today despite numerous attempts by the World Trade Organization (WTO) to encourage a reduction in average tariff levels between countries. Total Revenue Total Revenue (TR) refers to the amount of money received by a firm from selling a given level of output and is found by multiplying price (P) by output i.e. number of units sold (TR) Trade Trade is the exchange of goods or services. Trade improves consumer choice and total welfare. Individual have different skills. Regions or countries have different factor endowments e.g. climate, skilled labour force, and natural resources vary between nations. Therefore individuals, regions and countries are better placed in the production of certain goods than others Trade Off Economic choices almost always involve deciding between more of one product for less of

another. A trade off involves a sacrifice, an exchange, a giving up X for Y Value added Value added is the difference between inputs and outputs e.g. if a firm spends 500 making a good (inputs) and sells its product (output) for 750, then value added is 250 Variable costs Variable costs vary directly with output. I.e. as production rises, a firm will face higher total variable costs because it needs to purchase extra resources to achieve an expansion of supply. Common examples of variable costs for a business include the costs of raw materials, labour costs and consumables. Vertical integration Where a firm develops market dominance by integrating with different stages of production in the industry e.g. by buying its suppliers or controlling the main retail outlets. A good example is the oil industry where many of the leading companies are both producers and refiners of crude oil. Forward vertical integration occurs when a business merges with another business further forward in the supply chain. Backward vertical integration occurs when a firm merges with another business at a previous stage of the supply chain Wealth Wealth is a stock of assets that generates a flow of income and can be held in a variety of forms by individuals, firms and also the nation as a whole: Willingness to pay Willingness to pay is the maximum price a consumer is prepared pay to obtain a product rather than forego consumption and is shown by the demand curve. Working Capital Working capital refers to stocks of finished and semi-finished goods (or components) that will be either consumed in the near or will be made into finished consumer goods. Another term for stocks is inventories.

Abnormal profit Abnormal profit is any profit in excess of normal profit - also known as supernormal profit Anti competitive behaviour Anti-competitive practices are business strategies designed deliberately to limit the degree of competition inside a market Asymmetric information Information relating to a transaction in a market where there is imbalance in the information available to either the buyer or the seller. Asymmetric information can distort the working of the market mechanism and lead to market failure Barriers to entry Barriers to entry are designed to block potential entrants from entering a market profitably Behavioural economics A branch of economics which focuses on understanding the nature of human decision making and which explores how decisions are taken when economic agents do not have access to full and free information and when their behaviour is not automatically assumed to be rational Bilateral monopoly A market in which a single seller faces a single buyer. The final determination of price and output is such a situation is uncertain - much depends on the relative bargaining strength between the two parties concerned Business ethics Business ethics is concerned with the social responsibility of management towards the firms major stakeholders, the environment and society in general Collective bargaining Unions might seek to exercise their collective bargaining power with employers to achieve a mark-up on wages compared to those on offer to non-union members Competition policy Government policy which seeks to promote competition and efficiency in different markets and industries Complex monopoly A complex monopoly exists if at least one quarter (25%) of the market is in the hands of one or a group of suppliers who, deliberately or not, act in a way designed to reduce competitive pressures within a market Constrained revenue maximization Shareholders of a business may introduce a constraint on the price and output decisions of managers this is known as constrained sales revenue maximization

Consumer surplus Consumer surplus is the difference between the total amount that consumers are willing and able to pay for a good or service (indicated by the demand curve) and the total amount that they actually pay (the market price) Contestable market Baumol defined contestable markets as existing where an entrant has access to all production techniques available to the incumbents, is not prohibited from wooing the incumbents customers, and entry decisions can be reversed without cost. Cost benefit analysis Cost benefit analysis (COBA) is a technique for assessing the monetary social costs and benefits of a capital investment project over a given time period Cost reducing innovation Cost reducing innovations have the effect of causing an outward shift in market supply and they also provide the scope for businesses to enjoy higher profit margins with a given level of demand Cross subsidy A firm operates a cross subsidy when it uses profits from one line of business to finance losses in another line of business. There are many reasons for maintaining a cross subsidy, either to promote a product new to the market which is making losses, or as a form of predatory pricing designed to eliminate an existing competitor, the latter is illegal under UK and European competition law Dependency ratio The ratio of dependent population (the young and the elderly) to the working age population Deregulation of markets Also known as market liberalisation, de-regulation involves the opening up of markets to competition by reducing some of the statutory barriers to entry that exist Derived demand The demand for all factors of production (inputs), including labour, is a derived demand i.e. the demand for factors of production depends on the demand for the products they produce Diminishing returns The law of diminishing returns states that as we add more units of a variable input (i.e. labour or raw materials) to fixed amounts of land and capital, the change in total output will at first rise and then fall. Diminishing returns to labour occurs when marginal product starts to fall Diseconomies of scale A business may expand in the long run may expand beyond the optimal size in the long run and experience diseconomies of scale. This leads to rising LRAC. Disposable income Disposable income equals gross income net of direct tax payments and state welfare benefits.

Divorce between ownership and control The owners of a company normally elect a board of directors to control the businesss resources for them. However, when the owner of a company sells shares, or takes out a loan to raise finance, they sacrifice some of their control Dominant market position A firm holds a dominant position if it can operate within the market without taking account of the reaction of its competitors or of intermediate or final consumers. Duopoly Any market that is dominated by two organisations Duopsony Two major buyers of a good or service in a market Dynamic efficiency Dynamic efficiency occurs over time. It focuses on changes in the consumer choice available in a market together with the quality/performance of goods and services that we buy Economic efficiency Economic efficiency is achieved when an output of goods and services is produced making the most efficient use of our scarce resources and when that output best meets the needs and wants and consumers and is priced at a price that fairly reflects the value of resources used up in production Equilibrium wage The equilibrium price of labour (market wage rate) in a given market is determined by the interaction of the supply and demand for labour Excess capacity The difference between the current output of a business and the total amount it could produce in the current time period. Often in a recession or slowdown, there is a rise in excess capacity (= to a fall in capacity utilisation) due to a fall in demand. The effect can be to increase the average fixed costs of production Excess demand When demand for a good or service exceeds the production capacity of a business in a given time period. When a firm cannot raise output in the short term the elasticity of supply will be zero (i.e. perfectly inelastic) External benefits Positive externalities lead to social benefits exceeding private benefits External costs Negative spillover effects of production or consumption for which no compensation is paid. Externalities occur where the actions of firms and individuals have an effect on people other than themselves. With negative externalities, the social cost of production exceeds the private cost Gini coefficient The gini coefficient is a measure of income or wealth inequality. It is the ratio between the area between a Lorenz curve and the 45 degree line and the area below the 45 degree line. If the Lorenz Curve was the 45 degree line - then the value of the Gini Coefficient

would be zero, but as the level of inequality grows so does the Gini Coefficient. In the most extreme possible scenario the Gini Coefficient would be 1 Government failure Even with good intentions governments seldom get their policy application correct. They can tax, control and regulate but the eventual outcome may be a deepening of the market failure or even worse a new failure may arise. Imperfect competition Covers market structures between perfect competition and pure monopoly, i.e. an industry with barriers to entry and differentiated products - examples include oligopoly and duopoly Interdependence Interdependence exists when the actions of one firm has an effect on its competitors in the market. Interdependence is a common feature of an oligopoly Internal growth Internal growth occurs when a business gets larger by increasing the scale of its own operations rather than relying on integration with other businesses Labor demand There is normally an inverse relationship between the demand for labor and the wage rate that a business needs to pay for each additional worker employed Labor force The labor force is defined as the number of people either in work or actively seeking paid employment and available to start work. Labor market This is made up of firms willing to employ workers and labor seeking employment. The demand for labor by firms is downward sloping with respect to wage (price of labor), while the supply of labor by households is upward sloping with respect to wage. The labour market is in equilibrium where the demand for labor equals the supply of labor. Labor market discrimination Discrimination is a cause of labor market failure and a source of inequity in the distribution of income and wealth and it is usually subject to government intervention e.g. through regulation and legislation. Limit pricing When a firm sets price just low enough to discourage possible new entrants Marginal cost Marginal cost is the change in total costs from increasing output by one extra unit Marginal revenue Marginal Revenue (MR) = The change in revenue from selling one extra unit of output Marginal revenue product Marginal Revenue Product (MRPL) measures the change in total revenue for a firm from selling the output produced by additional workers employed

Market failure Market failure occurs when freely-functioning markets, fail to deliver an efficient allocation of resources. The result is a loss of economic and social welfare Market failure under monopoly The standard case against monopoly is that the monopoly price is higher than both marginal and average costs leading to a loss of allocative efficiency and a failure of the market mechanism Minimum efficient scale The minimum efficient scale (MES) is the scale of production where the internal economies of scale have been fully exploited. It corresponds to the lowest point on the long run average cost curve Natural monopoly For a natural monopoly the long-run average cost curve falls continuously over a large range of output. Negative externality A negative externality occurs where a transaction imposes external costs on a third party (not the buyer or seller) who is not compensated by the market. The result is a loss of allocative efficiency and shown by a reduction in economic welfare Non price competition Non-price competition assumes increased importance in oligopolistic markets. Non-price competition involves advertising and marketing strategies to increase demand and develop brand loyalty among consumers. Normal profit Normal profit is the minimum level of profit required to keep the factors of production in their current use in the long run Oligopoly An oligopoly is a market dominated by a few producers, each of which has control over the market. However, oligopoly is best defined by the conduct (or behaviour) of firms within a market rather than its market structure Operating costs Another term for variable costs Original income Original income comes from wages and salaries in work, self-employment income, investment incomes Overheads Another term for fixed costs Peak pricing When a business raises its prices at a time when demand has reached a peak higher prices might be justified on the grounds of the higher marginal costs of supply at peak times Penetration pricing A pricing policy used to enter a new market, usually by setting a very low price

Perfect price discrimination With perfect price discrimination, the firm separates the whole market into each individual consumer and charges them the price they are willing and able to pay Poverty trap A situation in which a rise in income results in the recipient being worse off once tax has been paid and benefits withdrawn. The poverty trap acts as a disincentive for people on low incomes to earn some extra income from working extra hours or taking another job Price discrimination Price discrimination occurs when a firm charges a different price to different groups of consumers for an identical good or service, for reasons not associated with costs Price fixing Price fixing represents an attempt by suppliers to control supply and fix price at a level close to the level we would expect from a monopoly Price leadership Price leadership occurs when one firm has a clear dominant position in the market and the firms with lower market shares follow the pricing changes prompted by the dominant firm Privatization Privatization means the transfer of assets from the public (government) sector to the private sector. In the UK the process has led to a sizeable reduction in the size of the public sector of the economy Producer surplus Producer surplus is the difference between what producers are willing and able to supply a good for and the price they actually receive. The level of producer surplus is shown by the area above the supply curve and below the market price Product differentiation Product differentiation occurs when a business seeks to distinguish what are essentially the same products from one another by real or illusory means. This means that the assumption of homogeneous products made under conditions of perfect competition no longer applies Product line pricing It is frequently observed that a producer may manufacture many related products. They may choose to charge one low price for the core product (accepting a lower mark-up or profit on cost) as a means of attracting customers to the components / accessories that have a much higher mark-up or profit margin. Product markets Product markets are where businesses and consumers meet to buy and sell the output of goods and services produced by an economy Production function A mathematical relationship between the output of a business in a given time period and the inputs (factors of production) used to produce that output. We normally

make a distinction between short run and long run production although this is often blurred in many industries Profit maximisation Profit maximisation occurs when marginal cost = marginal revenue (MC=MR) Returns to scale In the long run, all factors of production are variable. How output responds to a change in factor inputs is called returns to scale Revenue maximisation Revenue maximization is when MR = zero (i.e. when price elasticity of demand = 1) Satisficing behaviour Maximising behaviour may be replaced by satisficing which in essence involves the owners setting minimum acceptable levels of achievement in terms of revenue and profit. Second degree price discrimination This type of price discrimination involves businesses selling off packages of a product deemed to be surplus capacity at lower prices than the previously published/advertised price Short run The short run is defined as a period of time where at least one factor of production is assumed to be in fixed supply Shut down price In the short run the firm will continue to produce as long as total revenue covers total variable costs or put another way, so long as price per unit > or equal to average variable cost (AR = AVC). Social benefit Social benefits refer to the total benefit to society from a good i.e. the benefit to individuals and any beneficial unintended spill-over effects on third parties Spare capacity When a firm or economy is able to produce more with existing resources Static efficiency Static efficiency occurs at a point in time and focuses on how much output can be produced now from a given stock of resources, and whether producers are charging a price to consumers that reflects fairly the cost of the factors used to produce a product. Strategic entry deterrence Strategic entry deterrence involves any move by existing firms to reinforce their position against other firms or potential rivals Sub-normal profit Sub-normal profit - is any profit less than normal profit (where price < average total cost)

Two part pricing tariffs A fixed fee is charged (often with the justification of it contributing to the fixed costs of supply) and then a supplementary variable charge based on the number of units consumed Work leisure trade off The choice labor makes between working more hours and taking more leisure when the rate of income tax changes. X inefficiency The lack of real competition may give a monopolist less of an incentive to invest in new ideas or consider consumer welfare Business cycle The cyclic movement of an economy between periods of high and low growth. CPI Consumers Price Index, a measure of the prices of goods and services purchased by consumers, weighted according to the expenditure patterns of the average household GDP Gross Domestic Product, the total market value of all final goods and services produced in a country less the cost of goods and services used in their production, over a specified time period(usually a year or a quarter). Growth The increase in economic activity over a particular period often measured as percentage change in GDP. Hyper-inflation Very rapid increases in prices, a very high rate of inflation. Inflation/deflation The percentage increase or decrease in prices over time.