Absolute Advantage

Definition: what is absolute advantage? Roughly speaking the absolute advantage is about division of labor and specialization. The basic idea behind the absolute cost advantage is to find out where a particular product can be produced more cost-effectively than in another country. On the other hand, comparative cost advantages are used when a country can produce a product at lower opportunity costs (= alternative costs) than another country.

Absolute cost advantages

The theory of absolute cost advantages was already developed in 1776 by the economist Adam Smith. In his opinion, each country should specialize in the production of goods, where it has an absolute cost advantage. In addition, he believes that the existence of absolute cost advantages would lead to the trade of nations with each other and the welfare of each individual national economy. In simple terms, one can say that every country is to produce what it can make cheaper or faster than the foreign competition.

Absolute cost advantage - example:

In Spain, a single wine can be produced in 10 working hours. In Germany it takes 15 working hours for a single wine. Spain therefore has the absolute cost advantage in wine production. For this, Germany only needs 30 working hours per unit when producing iron, while Spain needs 50 working hours per unit. Germany is thus much more effective in the production of iron, so it has the absolute cost advantage here.

For 10 units of wine and 10 units of iron, Germany needs 450 working hours (300 + 150). The Spaniards, on the other hand, have to spend a total of 600 working hours (100 + 500) for every ten units. Both countries would therefore need 1,050 working hours. On the basis of the absolute cost advantages one can now say that it would make sense that both nations specialize in producing a product because they are better and more effective in it. Spain has the absolute cost advantage in the field of wine production, Germany in the production of iron.

If Germany were to concentrate on the production of iron and almost produce iron for Spain, Germany would need a total of 600 working hours (30 hours per unit) for the production of 20 units of iron. Spain, on the other hand, undertakes the complete production of the 20 units of wine and needs 200 hours (10 hours per unit). Overall, both economies therefore only need 800 working hours. The division of labor and specialization on the basis of the absolute cost advantages thus results in a work saving of 250 hours.

Conditions and criticism

For the theory of absolute cost advantages to work as described above, however, it must be ensured, inter alia, that there are no trade barriers between the participating economies in the course of the division of labor. Such an obstacle to trade is represented, for example, by import duties and export duties. In addition, it is necessary that every national economy actually produces the goods which appears effective from absolute cost advantages. If in the above example Germany were to produce the wine and Spain the iron, the time expenditure for both would not fall, but would increase extremely.

The theory of the absolute cost advantages is criticized mainly because it assumes that participating economies have to produce a good, which can make them more cost-effectively, thus more effectively. If a country does not have the absolute cost advantage for any product, it does not take part in foreign trade, according to Adam Smith's theory. This approach, however, has been replaced by the theory of the comparative cost advantage of David Ricardo.

Allocation

[caption id="attachment_803" align="aligncenter" width="698"] Allocation[/caption]

An allocation is the distribution of the available production factors in the national economy to the different possibilities of use.

Available resources must, therefore, be used effectively in order to save costs and, on the other hand, save time or protect the environment. The difficulty, however, is to find the optimal allocation.

This is the best possible use of the production factors that are available. The allocation describes both the process of optimally utilizing and allocating resources as well as the respective state. In addition, the allocation is usually controlled by markets that are adaptable on the one hand and flexible on the other.

Allocation problem

In the case of allocation, a primary goal is to use existing resources efficiently. The reason: All resources, whether employees or raw materials, cost money. The more efficient and advantageous these are used, the more economically an economy can ultimately produce. As a result of such an optimal allocation, the economy remains competitive in the long term.

In addition, many resources are limited, so they are not available in any amount. This also requires the use of an optimal allocation. This "distribution problem" is also referred to as an "allocation problem" in the technical language. Scarce resources are distributed here in order to achieve an optimal welfare. The production factors or resources that are scarce are primarily raw materials, labor, and capital.

Methods of allocation

In principle, differentiation is made between two different methods. The first possibility is that the distribution of resources is taken over by the respective markets themselves. But this usually only works in theory, if one assumes a complete market. The reality looks rather different and therefore makes the intervention of the state necessary.

Method 1: Market Mechanism

This methodology of the market mechanism, which is oriented towards the theory, means that the markets distribute the resources themselves. Since this is a theoretical optimum, we benefit from various advantages. In this way, for example, buyers get exactly the resources they need. In addition, the market mechanism can also promote technical progress. Finally, demanders themselves determine the extent to which they use which resources. Accordingly, all market participants are flexible.

Method 2: Intervention by the State

As a rule, state intervention is necessary to ensure a functioning market. The primary objective of the state is to distribute the existing production factors fairly. This state regulation differs in many respects from the market mechanism. Thus, for example, means of production are nationalized and prices are also fixed by the state. The available resources are distributed through "commodity-economic plan balances". This means that the state is quasi-required to specify which resources are being given.

And again briefly summarized:

• Allocation is the distribution of existing resources to different usage possibilities


• The aim is to achieve optimal allocation


• Allocation is important in the following scarce resources: labor, capital, land, raw materials


• The allocation problem or distribution problem also describes the difficulty of efficient resource utilization


• In the market mechanism, a distribution of resources takes place through the market itself


• Regarding state regulation, the state sets the framework conditions

Budget Line

The budget line represents all combinations of prices and goods. The total expenditure must correspond to the total income. The goods have a fixed price and the buyer has a fixed income.

Values ​​above the budget line can not be acquired because the financial resources are not sufficient. Under the straight line the purchase is not optimized.

Calculation of the budget line

Variables are required to perform a calculation. This is once the budget and once the cost per product . The variables are listed below as examples.

budget	Price of good 1	Price of good 2
200 €	2.50 €	4,00 €

Finally, the budget line is the graphical representation of all purchase options . In this principle, demand is regarded as infinite and the purchase is to be optimized. To draw a straight line, only two points are required in the diagram. The calculation of these points is as follows:

Max purchase good = budget / price of good

At our selected prices of the goods and the budget, the following values ​​are obtained:

Max purchase Good 1 = 200 € / 2,50 € = 80 pieces

 

Max purchase Good 2 = 200 € / 4,00 € = 50 pieces

The results of the calculation are given in units as shown.

Drawing the Budget Line

A coordinate system contains an X and a Y axis. These are labeled with one of the two goods. The points are marked in the coordinate system at points (0/80) and (50/0).

These two points are connected with a straight line. This is the budget straight. This represents all possibilities for how these two goods can be acquired in different numbers. The budget is exploited according to the optimization principle.

If the budget is increased, the straight line can be shifted on the respective axes.

Alternative Calculation

The variables are usually given the following names:

• M = Budget (often referred to as income


• P1 = price of good 1


• P2 = price of good 2


• X1 = number of good 1


• X2 = number of good 2

The following formula can be used and solved for x2 in order to achieve the desired result:

X2 = - (p1 / p2) * x1 + (m / p2)

In this way the slope can be calculated in the form of - (p1 / p2) . The formula should be applied in particular if the price can change. This is possible, for example, by additional taxation or a simple price change.

Cartel | Definition | Types | Examples

If a cartel is generally speaking a contractual transaction between at least two companies in the same stage of production, with the aim to gain an advantage on the competition to achieve. From a legal point of view, the companies remain independent and independent. However, the situation is different in terms of profitability. In the case of a cartel, this is generally abandoned completely or at least partially.

Basically agree companies in a cartel agreement economic action consistent. In the case of violations of the previously agreed contract, contractual penalties are due, which are usually at a very high level.

The state is of course reluctant to make such economic arrangements, especially with regard to pricing. For this reason, there is also the Cartel Office, which is to detect and prevent possible illegal price fixing of large companies at an early stage. In the eyes of the supervisory authority, in particular mineral oil groups, which have often been suspected, are prohibited price agreements. However, proof of this is hardly possible.

Types of Cartels 

• Price / sub-pricing


• Quotation quota


• Area cartels


• Rationalization

Company Concentration

In the term (corporate) concentrations are in the national economy to the agglomeration of economic powers. The reason for this merger is usually the stipulation of one-sided terms of contract that one would like to achieve.

Performed Concentrations for example, by companies acquired or new companies are formed. The state is, of course, not interested in the formation of such concentrations in the form of economic powers. Accordingly, he endeavors to prevent the formation of such as far as possible by all legal means. In the worst case, a concentration leads to a monopolistic position of the respective company.

Basically, the term "concentrations" differs between different types:

• Horizontal concentration


• Vertical concentration


• Conglomerate concentration

Horizontal concentration

With a horizontal concentration, two or more companies join together that are located on the same production stage. Thus the same products are produced both in one company and in the other. As a result, only a larger number of work equipment and employees is needed.

Vertical concentration

Unlike the horizontal concentration is in the vertical concentration to a merger of companies with upstream or downstream products. The purchased company does not produce the same products as the parent company. Example: A ship builder buys a supplier who supplies the company with raw materials.

Conglomerate concentration

Another type of business combination is the so-called conglomerate concentration. This is an acquisition outside the sector companies. A concentration of this kind exists, for example, when an oil company buys a forwarding company. From a conglomerate concentration arise Conglomerates , ie companies that are active in completely different industries.

Advantages of concentrations

While bringing together a number usually many risks and dangers, such as an impending monopoly with himself, but there are also some advantages. For example, a concentration offers the possibility of rationalization. In addition, better conditions are possible with possible financing. The prerequisite for this is, of course, that both companies are financially sound.

Elasticity

Supply and demand regulate the price of a commodity . This is certainly true not only in theory but also in practice. Everyone has already had the experience and / or had to make that a scarce supply leads in principle to the rising price - at least with the same demand. However, a rising price also means a drop in demand.

From a market point of view, this is a completely natural behavior of consumers. Since, however, this behavior of the consumer is not always the same in practice and can not always be identical, so-called elasticity concepts exist . These describe the behavior of consumers for possible price changes.

It is about whether and how much the consumption behavior of the market participants decreases or increases . This is generally dependent on which goods are within the scope of the consideration. With not every commodity, consumers can afford to stop or reduce their consumption. This applies, for example, to fuel and fuel. For this reason we are talking about a rather inelastic demand in this context.

Scarce goods of the same high price

Both price increases and price reductions would only have a minor effect on the quantities purchased by the consumers. The reason for this is that fuel and heating means are, for most people, one of the basic goods essential for the daily life. Savings and storage are hardly possible.

Even evasive goods are hardly available or often require expensive investments. In the case of luxury goods , on the other hand, a rather elastic demand can be observed. This means that price changes have a strong impact on the overall demand. Four elasticity terms are to be examined and explained in more detail below.

Content in the category Elasticity

• Completely inelastic demand


• Inelastic demand


• Elastic demand


• Fully elastic demand

 

Market Failure

In certain circumstances, the functioning of the market may be imperfect , for example, if the production factors are not used to achieve the greatest success for the economy as a whole. The market out of supply and demand then leads to undesirable side effects.

If there is a market failure , for example in the case of public goods, external effects or monopolies, the state intervenes. It attempts to prevent disadvantages of suppliers or consumers or to achieve more meaningful results from a macroeconomic perspective.

Support from the state

The state supports financially development and research work by companies in order to convince them to carry out fundamental research. For an individual company, this can result in high costs. However, the know-how is improved throughout the national economy . And other companies are benefiting from this. Without these state measures, companies would presumably do less research because only the research company would bear the costs, which would also benefit the competitor if, for example, patent rights expire after a certain time. The development of the economy as a whole can however have a low impact on research and lead to disadvantages of locations in international competition.

Example financial crisis

At the end of 2007, there was a financial market crisis that grew into a global economic crisis. The market mechanism on the capital and money markets no longer led to an optimal result. The lending within the banks almost came to a standstill, which led to the collapse of the international banks.

Only by the state intervention with

 

• Guarantees,


• Participations in banks and


• Financial assistance to the credit institutions (financial market stabilization fund)

The "credit line" and ultimately the breakdown of the entire banking system could be prevented.

Market failure of public goods

In the normal case the market works like this: A good is manufactured and passed to another at a certain price. If this does not pay the price, he will not receive the good either.

Then there are some public goods that everyone can "consume" without consideration, such as:

• Street lighting


• Fireworks


• Lighthouses


• Dikes


• Peace, national defense


• Climate protection


• Education / knowledge

Nobody has to pay for it, since nobody can be excluded. A firework can be made not only for the people who have paid for it. They also see people who have paid nothing. If someone asked if he would pay 50 euros for the fireworks, he would probably say no because he will see it anyway.

The problem : If nobody is willing to pay for it, it is not offered by anyone. The result is that there is neither street lighting nor a fireworks. In order for the public goods are still available, they have partly provided by the state and the tax financed are.

Market failure for external effects

A market failure also occurs if the polluter does not bear all costs incurred in production. There are then external effects, where the market results have an adverse effect on third parties (not buyers and sellers).

In this case, the market mechanism can not ensure an optimal allocation ( allocation ) of the production factors since they do not reflect the prices or costs.

Example:

If the environmental impact resulting from aluminum production is not included in the cost function, the market is not optimal.

Market failure in competition restrictions

In general, people avoid competition, which is probably due to their nature. Nevertheless, they want to make profits. For this reason, tendencies to the abolition or restriction of competition are repeatedly reflected in the open market economy.

Some of the numerous restrictions on competition are:

• duties


• Quotation and price agreements


• Difficult labor market access


• Import quotas


• Cooperations with competitors


• Monopolies under the protection of the state

These restrictions on competition are responsible for the fact that less is offered for more money. This allows the providers to make above-average profits. The profits are not achieved here by increasing their own performance, but because of competition restrictions. Together with the reduced volume, this has the consequence that the social welfare declines. Economists speak here of "rent seeking" (search for uninvited income). The state can only increase the prosperity of society by limiting these restrictions.

Market failure in asymmetric information

In a model competition, all market participants have complete information about the qualitative characteristics of the products, their usefulness and the behavior of the exchange partners. In practice, however, many market players frequently have information deficits that ultimately contribute to a market failure.

How will you ask questions such as "Mr. Fahrlehrer, do I need even more driving hours to pass the exam?" Or "Frau Apothekerin, I should take a drug against my cough?" Answered? In any case, the respondents will have the incentive to give an answer that will enable them to make further revenue. As a rule, it is difficult for the customers to check the answers because this information is asymmetrical or unequally distributed.

Capital

Capital Definition

The term "capital" has different meanings. Economists speak of capital as a third economic factor for production as a whole. In business, the term appears as equity or debt in corporate balance sheets.

Capital in economics

In economics, capital is a production factor. In this context, the capital of an economy describes the stock of production resources that can be used to produce goods or services (capital stock). Capital also includes the following, and not only include money.

• machinery


• Tools


• Company buildings


• Infrastructures such as computer systems or created processes

The other two factors of production in economics are labor and land. The latter is fixed by natural conditions such as the availability of mineral resources. The labor, on the other hand, is variable: it brings together all potentially active persons of an economy.

The combination of labor, capital, and land comes in simplified ratios to produce the gross domestic product or the potential performance of an economy. This is known as optimal allocation of resources Because the land is fixed. Hence, labor and capital can be exchanged to a certain extent. The best example of this is industrialization. 150 years ago many farmers had to cultivate a single field. Today, thanks to machines, many fields are handled by a single person, just because capital has taken the place of labor.

Capital in the commercial sense

Capital also plays a major role in the business administration. In the balance sheet, capital is shown on the liabilities side and designated as claims on the assets of a company. For example, a company that owns shares is the capital investor for a stock corporation and is entitled to have the share in company profits or the redemption of its capital when the securities are sold.

Capital Must be distinguished from the liquidity. Liquidity describes the possibility of a company to properly fulfill its claims against third parties. An example will illustrate the difference between capital and liquidity:

• A company purchases goods from a supplier for EUR 15,000. The supplier then supplies the goods and makes an invoice, which must be settled within two weeks.


• The company has a lot of equity, a total of more than 3 million. The problem is that equity is in the form of machines and buildings. These three million euros are therefore not directly available to the company - if no machines or buildings are sold.


• The settlement of the account of the supplier can only be settled by means of capital, which has a high liquidity, i.e. availability. The company must have at least € 15,000 in the form of cash or bank deposits in order to settle the claims.


• If the liquidity is not available, the company is threatened with insolvency - even though on balance sheet, three million euros of equity are listed.

Types of Capital

There are important delimitations between capital types both in business administration theory and in the economic sense. In business economics, a distinction must be made between leverage and equity:

• The differentiation between the types of capital is justified by the legal position of the investors.


• Equity owners participate in the company's profits and leave their capital for an indefinite period within the Group. In the event of a company insolvency, equity investors are not entitled to repay the invested capital. Examples: transfer of private assets to individual companies, purchase of shares, participation in a limited liability company


• However, borrowers provide their capital only for a limited period of time. They receive their capital completely, including a consideration - usually an interest rate. If the company has to file for insolvency, the debtor's claims are fulfilled before anyone else. Examples: bank loans, corporate bonds

In the economic sense, we can differentiate between real capital and human capital. Both terms are also used in business administration. The Real capital describes all means of production such as machines or tools as well as money since this can be used directly to finance production resources.

Human capital, however, is the performance potential of the labor force, which is affected by training and education. Training and education increase the efficiency of this factor of production.

For example, the earning power of workers can be encouraged by a high degree of schooling or vocational training. Which requires high financial expenditures - that is, the use of capital. For this reason and because human capital is difficult to measure, economists consider both the concepts separately.

Pareto Principle

The 80:20 rule describes a trend or trend that is still surprising in many industries, according to which about 20 percent of customer connections contribute to 80% of company success.The rule of Vilfredo Federico Pareto was already formed more than 150 years ago, although the economies of that time were still dominated by smaller companies and multinational companies have not yet been active worldwide.

The 80:20 rule, also known as the Pareto rule , is not the exact percentage, but a basic statement that also characterizes the organizational structure of most companies in the 21st century. A large number of business relationships contribute only a fraction of the company's success , A small percentage of top customers or top business relationships is crucial.

Impact of the 80:20 rule: graded service levels depending on coverage or turnover

In most companies the implementation of the 80:20 rule has a multi-stage sales structure: this is divided into customer consulting or sales for standard customers and another organizational unit for the most important customers, which usually also reports directly to the Management Board. The names in the different industries are different, but the principle is the same: in normal sectors, normal customer relationships are maintained by a service team, a branch team or a service center. After reaching a certain level of sales, personal contact persons or teams will be commissioned to deal more intensively with the handling of this crucial business of the future of the company.

In the banking sector, for example, a "standardized mass customer transaction" or "retail banking" is used for the accounts with low coverage. This includes asset management or services for "selected clients" right up to "private banking" or wealth management. When it comes to distributing goods or machinery, it is often the case that there is a regional organization for the average customer and a further organizational unit for the special customers.

In many industries, the entire customer experience is aligned with the 80:20 rule

In industries where customers are not first-class customers of the 80/20 rule, companies have established a system for approximately fifteen to twenty years to make the customer experience of the top customers more comfortable. Customers are handed out differently colored customer cards so that the preferential treatment can be delivered not only on the actual purchase of the day, but also on the value of the total customer connection. The fact that this strategy is successful is demonstrated by various shitstorms, which break out whenever a group of customer groups are shortened or when the access requirements for a high customer color are changed. The most active in this area are airlines, hotel chains and credit card issuers.

From the 80: 20 rule to portfolio analysis

As soon as the link between company success and the respective "Top 20" is clarified, this basic consideration can be extended to many different areas of the company. If you are generating sales statistics, you will quickly notice that there are some top sellers or blockbuster who generate a large part of the sales and are therefore of paramount importance for the company's survival and value development. Therefore, in almost every area, companies are guided by a value-added approach and the right entrepreneurial activities are focused on the activities that best serve the company's objectives. Over time, the view has been further developed into a portfolio view, and a distinction is made between A / B / C customers or products.

The 80:20 rule has the following importance for companies:

• It describes a link between company success and the sources


• It provides indirect information on how the company organization should be set up


• It is a long-term relationship and is relatively independent of the sector and the company