Deadweight Loss

Deadweight loss is the fall in total surplus that results from a market distortion, such as a tax. In economics, a deadweight loss (also known as an excess burden or allocative inefficiency) is a loss of economic efficiency that can occur when equilibrium for a good or service is not achieved or is not achievable.

Under limited circumstances, it can be assumed that monopolies are the cause of welfare losses. The welfare loss, in this case, is based on the assumption that the monopolies cause one or more inefficiencies. Basically, the reduction of the consumer's pension is seen as a welfare loss. Marshall defines it that way, on condition that the optimality conditions of the comprehensive competition are disturbed.

Monopolies can have positive effects and are not always the cause of a welfare loss. A technical advance or a short-term maximization of profit may have beneficial effects, but will not be considered in this analysis.

A loss of welfare occurs when the number of goods produced deviates from the optimal amount. The balance in the competitive market would be disturbed. In theory, welfare losses can be calculated. Taxes, duties, and prices, as well as monopoly formations, are included in the calculation. A consideration of the welfare loss is never complete. Future effects cannot be included in the calculation because the market and the behavior of the consumers are subject to a certain dynamic.

Calculate welfare loss

Welfare loss, also called deadweight loss , can be calculated using the following formulas:

Function of market demand: D (p) = 200 - 2p
Function of the market offer: S (p) = 50 + p

First, this function can be compared and calculated in lockstep:

200 - 2p = 50 + p = 150 = 3p
p = 50; x = 100

Finally, the quantity tax is included in the calculation. Here we assume a tax rate of 7.5 percent:

200 - 2 (p + 7.5) = 50 + p = 200 - 2p - 15 = 50 + p
135 = 3p

Including the quantity tax, p = 45 and x = 95. The welfare loss can be calculated as follows:

W = 0.5 * taxes * (x without quantity tax - x with quantity tax)
W = 0.5 * 7.5 * (100-95) W = 18.75

Business Combinations

 

A business combination will transform legally and economically independent companies into larger business entities. As a result, the economic and legal independence of individual companies can be lifted. But it is also a loose cooperation without loss of independence of individual companies conceivable.

An overview of the forms of business combinations

A merger results in a merger of several independent companies. This merger can take place, for example, in the following form:

• through the formation of a cartel


• through the formation of a group


• by entering into a merger


• through the formation of an association


• through the formation of a community of interest


• through the formation of an occasional society


• through the formation of a joint venture

In all these forms of business combinations, there are certain special features. In a merger in the form of cooperation, such a form of the merger is, for example, in a community of interests, the merged companies remain legally independent and lose their economic independence is not complete.

By contrast, a merger in the form of concentration leads to the loss of the economic independence of individual companies.Legally, companies, if, for example, a corporation should be formed, can remain independent. Likewise, it is also possible that the individual companies lose their legal independence. This is the case, for example, when a merger is entered into.

The legal aspects of a business combination

Business combinations can give businesses an economic advantage. In some cases, a merger gives companies the opportunity to acquire a dominant position. To prevent this, German competition law provides for restrictions on business combinations.More detailed information on the restrictions can be found in Germany in the Law against Restraints of Competition.

Business combinations can give businesses an economic advantage. In some cases, a merger gives companies the opportunity to acquire a dominant position. To prevent this, German competition law provides for restrictions on business combinations.More detailed information on the restrictions can be found in Germany in the Law against Restraints of Competition.

Supply Curve | Definition | Explanation | Graphical Representation

Supply Curve Definition

The supply curve is a graphic illustration of the interaction of price and supply. The principle is that the higher the price, the greater the supply of producers.

The term supply curve comes from the field of economic theory and describes the natural relationship between supply and price of a product or service. The fundamental consideration behind the term is the fact that the higher the price to be paid for it, the higher the quantity supplied of a good. 

The supply curve is therefore usually rising more or less - depending on the product concerned. The course of the supply curve is also influenced by the so-called supply elasticity. This indicates how strong the relative quantity change is in relation to the corresponding price change.

Explanation of the supply curve

The supply curve graphically illustrates the relationship between the price and the quantity supplied for a good. The key idea: the higher the price of a good, the higher the quantity supplied. Thanks to the higher price, the producers can generate higher profits, which serves as an incentive for the expansion of the production volume. On the other hand, if the price is comparatively low, the production is hardly or not at all worth it. In addition, higher production quantities, in theory, are usually associated with higher marginal costs.

Classically, the supply curve goes up from the origin at a 45-degree angle. However, displacements of the curve are also conceivable. If the curve does not originate from the zero point, but on the Y-axis, then the production of the good pays off only from this point or price.

Important statements of the supply curve - displacement, elasticity, marginal costs

The supply curve not only indicates the quantity produced at a given price. It has the following important information ready:

• Elasticity: The slope of the supply curve allows a statement about the supply elasticity. It measures how much supply changes when the price is lowered by 1 percent. If the quantity supplied decreases more than 1 percent, then one can say that the product has an elastic supply. The supply curve is very steep in this case.


• Marginal cost: The supply curve always shows the marginal cost of the producer, if it is a market with perfect competition.


• Shift: Changes in the market composition or the market situation can be identified by shifts in the supply curve. If the general production costs fall, the supply curve shifts to the right or down. Because then, at the same price, significantly more goods can be produced cost-effectively.

 

On the open market, goods and services are offered and demanded. On the supply side, depending on the type of good or service there are different providers. The supply quantity of these goods depends on the price, the corresponding graphical representation is the supply curve.

The supply curve shows the quantity of a specific good or service as a function of the price, with the offer quantity being plotted on the abscissa. The providers will offer more goods of this kind at a higher price, or at lower prices, they will offer less.

Other courses of the supply curve are rather rare, for example, perishable goods. In that case, the supply can increase even with falling prices. Classic goods and services, such as a property, are then offered more frequently when prices rise, or the other way round, the price has to rise until another provider decides to offer their property to the market.

Shift of the supply curve

Under certain conditions, the supply curve may shift. In the case of real estate, this could be the case if the state subsidizes new housing construction and, accordingly, more new buildings are built. The supply curve shifts to the right, in this case, more suppliers will offer the good at the same prices. A shift to the left can occur when raw materials for the construction of real estate become more expensive.

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Demand Function

In economics, the demand function represents consumer demand for a commodity as a function of price. The graphical representation is made on a coordinate axis (Y-axis is price / X-axis is quantity) which is known as demand curve.

Definition / Explanation

The demand function is a function that shows the consumer demand for a good in relation to the price. Compared to the demand function is the so-called supply function, which defines the supply as a function of the price.

At the point where demand function and supply function intersect, the market equilibrium can be determined, i.e. the price/quantity combination in which the demand for the good corresponds to the quantity offered at this price.

As a rule, the demand function is displayed directly in a coordinate system. The so-called abscissa (X-axis) represents the offered quantity and the ordinate (Y-axis) the price.

It is usually a strict monotone and falling function. By this, it is meant that with falling prices the demand will increase and with increasing prices the demand decreases.

The demand is clearly limited to this model because it is calculated with a certain price, which starts with a value zero. So if a potential buyer is no longer willing to pay a certain price, the demand value is zero. In technical terms, this price is also referred to as the prohibitive price, which is recognizable as the intersection point on the Y-axis.

If the price drops, so does the demand for a product. However, the falling price will not necessarily lead to an infinitely high demand. The market is saturated from a certain point, which can be seen at the intersection on the X-axis.

Special Features and Characteristics

The demand or the supply depending on the price formation is processed in the functions. An intersection of the two components creates a market equilibrium in monopoly formation.

There are usually several suppliers for a particular product. The prices vary and have to be adapted exactly to the market situation. This is the responsibility of the demand function, which gives an optimal picture of what the current situation looks like.

Summary

• Demand function describes consumer demand for a good in relation to its price.


• With demand function and supply function, market equilibrium can be determined


• Representation: X-axis = quantity demanded and Y-axis = price


• usually strictly monotonous and falling function