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AS LEVEL BUSINESS
IMPORTANT DEFINITIONS
Definitions

Need A good or service essential for living

Want A good or service which people would like to

have but which is not essential for living.
These are unlimited

Economic Problem Results from their being unlimited wants but

limited resources to provide the goods and
services to satisfy these wants. This creates
scarcity

Factors of Production The resources need to produce goods or

services. There are four and are in limited
supply (Land, Labour, Capital, Enterprise)

Scarcity The lack of sufficient products to satisfy the

total wants of the population

Opportunity Cost The next best alternative given up by

choosing another item

Division of Labor When the production process is split up into

(Specialization) different tasks and each worker performs
one of these tasks

Businesses Combine factors of production to make

products which satisfy the people’s wants

Business Objectives The aims or targets that a business works

towards such as profit maximization,
increasing market share.

Value Added The difference between the selling price of a

product or service and the cost of bought in
materials and components.
Formula
Value added = Selling price – Cost price

Prepared by Ms. Himani Kapoor

Stakeholder Any person or group with direct interest in
the performance and activities of a business
such as owners, managers , employees

Primary Sector Extracts and uses the natural resources of

the Earth such as minimg , agriculture

Secondary Sector Manufactures goods using the raw materials

provided by the primary sector such as
automobile, rubber industries

Tertiary Sector Provides services to consumers and the

other sectors of industry such as hospitals,
schools

De-industrialization When there is a decline in the importance of

the secondary sector industry in a country

Free Market Economy No government control over factors of

production. It is controlled by private firms.

Monopoly Business which controls all of the market for

a product

Command Economy Does not have a private sector as all

resources are owned by the state

Mixed Economy Has both a public and a private sector

Capital The money invested into a business by the

owners

Profit The surplus after total costs have been

subtracted from the sales revenue

Internal Growth When a business expands its existing

operations

External Growth When a business takes over or merges with

another business

Merger When owners of two companies agree to

join together their firms to make one
business

Prepared by Ms. Himani Kapoor

Takeover When one business buys out the owners of
another business which then becomes part
of the competitors business

Horizontal Integration When one firm merges with or takes over

another one in the same industry at the
same stage of production

Vertical Integration When one firm merges with or takes over

another one in the same industry but at
different stages of production

Conglomerate Integration When one firm merges with or takes a firm

in a completely different industry

Limited Liability The owners of a company cannot be held

responsible for the debts of the company
they own and their liability is only limited to
the investment they made in buying the
shares

Partnership Agreement Written and legal agreement between

business partners

Unincorporated Business One that does not have a separate legal

identity such as sole trader and
partnership
Shareholders The owners of a company who buy shares
which represent part ownership of the
company

Prospectus A detailed document issued by the directors

of a company when they are converting it to
a PLC status. It is an invitation to the general
public to buy shares in the newly formed
PLC.

Annual General Meeting A legal requirement for all companies in

which it is voted on who should be on the
Board of Directors for the upcoming year

Dividends Payments made to shareholders from the

profits of a company after it has paid
corporation tax. They are the return to the
shareholders for investing in the business

Prepared by Ms. Himani Kapoor

Franchise A business based upon the use of the brand
names, promotional logos and trading
methods of an existing successful business

Inflation The increase in the average price level of

goods and services over time

Unemployment When people who are willing and able to

work cannot find a job

Economic Growth When a country’s GDP increases

Balance of Payments Records the difference between a country’s

exports and imports

Real Income The value of income and falls when the

prices rise faster than money income

Gross Domestic Product The total value of output of goods and

services in a country in one year

Exports The goods and services sod from one

country to another country

Imports Goods and services bought in by one country

from another country

Exchange Rate The price of one currency in terms of

another

Currency Depreciation The fall in the value of currency compared

with other currencies- it buys less of another
currency than before

Currency Appreciation The rise in the value of currency compared

with other currencies- it buys more of
another currency than before

Fiscal Policy Any change by the government in tax rates

or public sector spending

Direct Taxes Paid directly from incomes

Indirect Taxes Added to the prices of goods and the

taxpayers pay the tax as they purchase the
goods

Prepared by Ms. Himani Kapoor

Disposable Income The level of income a taxpayer has after
paying income tax

Import Tariff A tax on an imported product

Import Quota A physical limit to the quantity of a product

that can be imported

Monetary Policy A change in the interest rates by the

government or central bank

Supply Side Policy Used by the government to improve the

efficient supply of the goods and services in
their country

Ethical Decision Decision taken by a manager because of the

moral code observed in that firm such as
protecting environment.

Industrial Tribunal Legal meeting which considers workers’

complaints of unfair dismissal or
discrimination at work

Contract of Employment Legal agreement between employer and

employee listing the rights and
responsibilities of the workers

Constraint Something that limits or controls the actions

and decisions of a company

External Constraint Constraints over which a business has no

direct control

Social Responsibility When a business takes decisions that may

benefit stakeholders other than
shareholders

Pressure Groups Formed by people who share a common

interest and who will take action to try and
change the government policy or business
decisions

Cost-Benefit Analysis Valuation by a government agency of all the

external and private costs and benefits
resulting from a business decision

Prepared by Ms. Himani Kapoor

External Costs The costs paid by the rest of the society
other than the business as a result of a
business decision

External Benefits The gains to the rest of the society other

than the business resulting from a business
decision

Private Cost The costs of a business decision actually paid

for by the business

Private Benefit The financial gains made by a business as a

result of a business decision

Social Cost Addition of the private and external costs of

a business decision
Social cost = Private cost + External cost

Social Benefit Addition of the private and external benefits

of a business decision
Social benefit = Private benefit + External
benefit

Fixed Costs Costs which do not change with the number

(Overhead Costs) of items sold or produced in the short term.
They must be paid whether or not the
business is making any sales

Variable Costs Costs which vary with the number of items

(Direct Costs) sold or produced. They can be directly
related to or identified with a particular
product

Total Cost Fixed and variable costs combined

TC = Fixed cost + variable cost

Break-even Charts Graphs which show how the costs and

revenues of a business change with sales.
Break even is the point where there is “no
Profit no Loss”

Revenue The income during a period of time from the

sale of goods and services
Revenue = Price * Output sold

Break-even Point The level of sales at which total costs equal

total revenue

Prepared by Ms. Himani Kapoor

 Total revenue = Total Cost

Contribution The selling price less variable cost

Marginal Costs The extra costs that a business will incur by

producing one more unit of output

Average Cost per Unit (AC) Total cost of production divided by total
output
AC = Total cost / total output

Economies of Scale Factors that lead to a reduction in average

costs as a business increase in size

Forecasts Predictions of the future

Trend Underlying movement or direction of data

over time

Line of Best Fit Line drawn through a series of points which

best show the trend of that data

Budgets Plans for the future containing financial or

numerical targets

Accounts Financial records of a firm’s transactions

Final Accounts Produced at the end of the financial year and

give details of the profit or loss made over
the year and the worth of the business.

Statement of Profit and loss (Income It is a financial statement which shows how
statement) the gross and net profit/loss of a business is
calculated

Cost of Goods Sold (COGS) Cost of producing or buying in the goods

actually sold by a business during a time
period.

Sales Revenue Income to a business during a period of time

from the sale of goods and services

Gross Profit Made when sales revenue is greater than the

cost of goods sold
Gross Profit = Sales revenue – Cost of
goods sold

Prepared by Ms. Himani Kapoor

Net Profit Profit made by a business after all the costs
have been deducted form sales revenue.
Net profit = Gross Profit – operating
expenses

Depreciation The fall in the value of a fixed asset over time

Appropriation Account That part of the profit and loss account

which shows how the profit will be
distributed after tax- either given as
dividends or kept in as retained profits

Retained Profit The net profit reinvested back into a

company after deducting tax and payments
to owners such as dividends

Statement of financial position (Balance Shows the value of a business’s assets,

Sheet) equity and liabilities at a particular time

Assets Those items of value which are owned by the

business such as land, building

Liabilities Items owed by the business and repaid by

the business such as loans , trade payables

Return on Capital Employed (ROCE) Shows how much profit is made as a

proportion of the capital that has been
invested in the business.
ROCE = Net profit *100
Capital employed.

Liquidity Ability of a business to pay back its short-

term debts

Current ratio This ratio compares the ability to use current

assets to pay the current liabilities. An ideal
ratio is 2:1.
Current ratio = Current assets / Current
liabilities

Quick ratio /Acid test ratio
This ratio shows if there is enough cash
assets to pay current liabilities.
Quick ratio = Quick asset – Current
liability
Quick asset = Current assets – unsold
stock

Prepared by Ms. Himani Kapoor

Gross profit margin/ratio Gross profit margin = Gross profit *100
sales revenue

Net profit margin / ratio Net profit margin = Net profit *100
sales revenue

Gearing ratio that means the proportion of finance that

is provided by debt relative to the finance
provided by equity

Cash-Flow It is financial statement shows cash inflows

and outflows of a business over a period of
time

Cash Flow Cycle The stages between paying out cash for
labor, materials etc. and receiving cash from
the sale of goods

Cash Flow Forecast An estimate of future cash inflows and

outflows of a business, usually on a monthly
basis. This will then show the expected cash
balance at the end of each month

Opening Cash Balance The amount of cash held by the business at

the start of the month

Net Cash Flow The difference between inflow and outflow

of cash

Closing Cash Balance Amount of cash held by the business at the

end of each month. This becomes the next
month’s opening cash balance

Start-up Capital The finance needed by a new business to pay

for essential fixed and current assets before
it can start trading

Capital Expenditure Money spent on fixed assets which will last

longer than a year

Revenue Expenditure Money spent on day-to-day expenses which

do not involve the purchase of a long-term
asset

Organizational Structure Refers to the levels of management and

division of responsibilities within an
organization

Prepared by Ms. Himani Kapoor

Job Description Outlines the responsibilities and duties to be
carried out by someone employed to do a
specific job

Delegation Giving authority to a subordinate to perform

particular tasks. The final responsibility,
however, remains in the hands of the
manager

Chain of Command The structure in an organization which

allows instructions to be passed down from
senior management to lower levels of
management

Span of Control Number of subordinates working directly

under a manager

Line Managers Have direct authority over subordinates in

their department. They are able to take
decisions in their departmental area

Staff Managers Specialist advisers who provide support to

line managers and to the Board of Directors

Decentralized Management Structure Many decisions are not taken at the center of
the business but instead are delegated to a
lower level of management

Centralized Management Structure Most decisions are taken at the center or

higher levels of management

Strategic Decisions Very important decisions which can affect

the overall success of the business

Tactical Decisions Tactical decisions are medium term, less

complex decisions made by middle
managers

Operational Decisions Day-to-day decisions which will be taken by

a lower level of management

Communication The transferring of a message from the

sender to the receiver who understands the
message

Medium of Communication The method used to send a message

Prepared by Ms. Himani Kapoor

Feedback The reply from the receiver which shows
whether the message has arrived, been
understood and, if necessary, been acted
upon

One-way Communication Involves a message which does not call for

or require a response

Two-way Communication When the receiver gives a response to the

message and there is discussion about it

Internal Communication When messages are sent between people

working in the same organization

External Communication When messages are sent between one

organization and another organization or an
outside individual

Communication Nets The ways in which members of a group

communicate with one another

Motivation The reason why employees want to work

hard and effectively for the business

Wage A payment for work, usually paid weekly

Salary Payment for work, usually paid monthly

Commission Payment relating to the number of sales

made

Profit-Sharing A system whereby a proportion of the

company’s profits is paid out to the
employees

Bonus An additional amount of payment above

basic pay as a reward for good work

Performance-Related Pay Pay which is related to the effectiveness of

the employee

Appraisal A method of assessing the effectiveness of an

employee

Fringe Benefits Non-financial rewards given to employees

Prepared by Ms. Himani Kapoor

Job Satisfaction Enjoyment derived from feeling that you
have done a good job

Job Rotation Involves workers swapping round and doing

each specific task for only a limited time and
then changing round again

Job Enlargement Extra tasks of a similar level of work are

added to a worker’s job description

Job Enrichment Involves looking at jobs and adding tasks

that require more skill and/or responsibility

Leadership Styles Different approaches to dealing with people

in a position of authority

Autocratic Leadership When the manager expects to be in charge of

the business and have their orders followed-
there is little/no opportunity for workers to
comment on anything. One way
communication is there.

Democratic Leadership Involves a team guided by a leader where all

individuals are involved in the decision-
making process to determine what needs to
be done and how it should be done.

Laissez faire Leadership (Let them free)
Laissez-faire leaders allow followers to have
complete freedom to make decisions
concerning the completion of their work. It
allows followers a high degree of autonomy
and self-rule, while at the same time offering
guidance and support when requested

Formal Group A group designated to carry out specific

tasks within a business

Informal Group Group of people who form independently of

any official groups set up within a business
and who have similar interests or something
else in common

Job Analysis Identifies and records the responsibilities

and tasks related to a job

Prepared by Ms. Himani Kapoor

Job Specification Document which outlines the requirements,
qualifications, expertise, physical
characteristics etc. for a specified job

Internal Recruitment When a vacancy is filled by someone who is

an existing employee of a business

External Recruitment When a vacancy is filled by someone who is

not an existing employee and will be new to
the business

Inundation Training Introduction given to a new employee,

explaining the firm’s activities, customs and
procedures and introducing them to fellow
workers

On-the-job Training Watching a more experienced worker doing

the job

Off-the-job Training Involves being away from the workplace,

usually by specialist trainers

Workforce Planning Establishing the workforce needed by the

business for the foreseeable future in terms
of the number and skills of the employees
required

Redundancy When an employee is no longer needed and

so loses their job- not due to any aspect of
their work being unsatisfactory

Trade Union Group of workers who have joined together

to ensure their interests are protected

Craft Union Trade union which represents a particular

type of skilled worker

General Union Trade union which represents workers from

a variety of trades and industry- they are
often unskilled or semi-skilled

Industrial Union Trade union which represents all types of

workers in a particular industry

White-Collar Union Trade union which represents non-manual

workers

Prepared by Ms. Himani Kapoor

Closed Shop All employees must be a member of the
same trade union

Negotiation Joint decision making involving bargaining

between representatives of the management
and of the workforce within a firm in hopes
to arrive at a mutually acceptable agreement

Collective Bargaining Negotiations between one or more trade

unions and one or more employers on pay
and conditions of employment

Productivity Agreement Workers and management agree on an

increase in benefits, in return for an increase
in productivity

Industrial Action Action taken by the trade unions to decrease

or halt production

Strike When employees refuse to work

Picketing When employees who are taking industrial

action stand outside their workplace to
prevent or protest at the delivery of goods,
arrival and departure of other employees
etc.

Work-to-Rule Rules are strictly obeyed so that work is

slowed down

Go Slow Employees do their normal tasks but slower

than usual

Non-cooperation Employees refuse to comply with the new

working practices

Overtime Ban Employees refuse to work longer than their

normal working

No-Strike Agreement When trade unions and management agree

to have pay disputes settled by an
independent arbitrator instead of taking
strike action

Arbitrator Listens to both sides in the industrial dispute

and then gives a ruling on what they think is
fair to both sides

Prepared by Ms. Himani Kapoor

Lock-Out Employees are locked out of their workplace
by the employers

Worker Participation When employees contribute to decision-

making in the business

Works Councils Committees of workers who are consulted

or informed on matters that affect
employees

Market Where buyers and sellers come together to

exchange products for money

Product-Oriented Approach A business whose main focus of activity is

the product itself

Market-Oriented Approach A business which carries out market

research to find out consumer wants before
a product is developed and produced

Marketing Budget Financial plan for the marketing of a product

or product range for some specified period
of time

Marketing Management process which identifies

customer wants, anticipates future wants
and then goes about satisfying them
profitably

Market Share The percentage of total market sales held by

one brand or business

Market Segmentation Market is divided up into groups of

consumers who have similar needs

Mass Market A very large number of sales for a product

Niche Market Small, specialized segment of a much larger

market

Primary Research Collection and collation of original data via

(Field Research) direct contact with potential or existing
customers

Secondary Research Information which has already been

(Desk Research) collected and is available for use by others

Prepared by Ms. Himani Kapoor

Questionnaire Set of questions to be answered as a means
of collecting data for market research

Consumer Panels Groups of people who agree to provide

information about a specific product or
general spending patterns over a period of
time

Random Sample When people are selected at random as a

source of information for market research

Quota Sample When people are selected on the basis of

certain characteristics as a source of
information for market research

Brand Name Unique name of a product that distinguishes

it from other brands

Brand Loyalty When consumers keep buying the same

brand again and again instead of choosing a
competitor’s brand

Brand Image Image or identity given to a product which

gives it a personality of its own and
distinguishes it from its competitors brands

Packaging The physical container or wrapping for a

product- also used for promotion and selling
appeal

Product Life Cycle Describes the stages a product will pass

through from its introduction, through its
growth until it is mature and then finally its
decline

Trade Cycle A cycle or series of cycles of economic

expansion and contraction

Cost-Plus Pricing Cost of manufacturing the product plus a

profit mark-up

Penetration Pricing When prices are set lower than the

competitors’ prices in order to be able to
enter a new market

Price Skimming High price set for a new product on the

market due to its novelty factor

Prepared by Ms. Himani Kapoor

Competitive Pricing Product is priced in line with or just below
competitors’ prices to try to capture more of
the market

Promotional Pricing When a product is sold at a very low price

for a short period of time

Psychological Pricing When particular attention is paid to the

effect that the price of a product will have
upon the consumers’ perceptions of the
product

Informative Advertising The emphasis of advertising or sales

promotion is to give full information about
the product

Persuasive Advertising Advertising or promotion which is trying to

persuade the consumer that they really need
the product and should buy it

Target Audience Refers to the people who are potential

buyers of a product or service

Channel of Distribution The means by which a product is passed

from the place of production to the customer
or retailer

Agent An independent person or business that is

appointed to deal with the sales and
distribution of a product or range of
products. The agent will either put an
additional amount on the price to cover their
expenses or will receive a commission on
sales

Productivity Output measured against the inputs used to

create it

Labour Productivity Output per worker or per hour worked.

Productivity = output / no of labour used

Capital Productivity Output per machinery produced

Job Production A single product is made at a time

Prepared by Ms. Himani Kapoor

Batch Production A quantity of one product is made, then a
quantity of another item will be produced
depending on the orders which come in

Flow Production Large quantities of a product are produced

(Mass Production) in a continuous process

Lead Time Margin of time between the date when stock

is obtained and the date when it is sold

Lean Production Techniques used by businesses to cut down

on waste and therefore increase efficiency

Kaizen A process of continuous improvement

through the elimination of waste

Just-in-Time (JIT) Production method that involves reducing or

virtually eliminating the need to hold stocks
of raw materials or unsold stocks of the
finished products. Supplies arrive just at the
time they are needed

Quality Control A system of maintaining standards in

manufactured products by testing a sample
of the output against the specification.

Quality Assurance The maintenance of a desired level of quality

in a service or product, especially by means
of attention to every stage of the process of
delivery or production.

Total Quality Management(TQM) Continuous improvement of products and

processes by focusing on quality at each
stage of production

Common Currency Result of an agreement between countries to

use the same currency for all business and
other transactions- e.g. euro in EU

Globalization The process by which businesses or other

organizations develop international
influence or start operating on an
international scale

Multinational (Transnational) Businesses A business with factories, production or

service operations in more than one country

Prepared by Ms. Himani Kapoor

Corporate social responsibility It is when companies integrate social and
environmental concerns into their business
operations and in their interaction with their
stakeholders on a voluntary basis.

Sustainability It refers to anything and everything to do with

reducing the damage we are causing the
environment

Sustainable development “Development that meets the needs of the

present without compromising the ability of
future generations to meet their own needs.”

Prepared by Ms. Himani Kapoor