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

Externalities

When one speaks in the national economy of so-called externalities, one basically means economically oriented decisions of companies that unintentionally hit uninvolved market participants.

The person causing the damage, ie the company here, does not compensate. The injured and uninvolved market participants are therefore not awarded any compensation for the inconvenience caused.

As a result, the cessation of the companies that accept such externalities is quite egotistical and only aimed at the highest possible profit. Social and ecological goals remain completely ignored. But what kinds of externalities are there in the economy and what could be practical examples?

Types and Examples of Externalities

In principle, an externality can be positive or negative. Not every externality has to be bad at the same time. A negative external effect is the so-called external cost. In rare cases, however, externalities can also be positive. Then one speaks of an external benefit .

There are countless examples of externalities that are often associated with the environment and with health.

For example, a coal-fired power station produces energy and as a waste product, pollutants are released during production, which are simply released into the environment. The inhabitants of the coal-fired power station could be harmed in health and need treatment. The costs that must be spent on the health recovery of the residents are the external costs. Under normal circumstances the coal-fired power station does not pay these costs, which is why it is an external effect, or more precisely an external cost.

Another example: a motorway is expanded by two additional bumpers and residents are bothered with additional noise by passing cars. If an appropriate noise barrier is built, it is an external effect. The highway is used by countless car and truck drivers. None of them paid for the noise protection.

Development of Externalities

If a company has to keep an eye on the costs of its production, ecological and social objectives are completely ignored. The social costs are, for example, passed on to society through the egoistic approach of the victims. A (financial) compensation does not take place. Since a large part of the companies almost always have the highest possible profit in mind, it often happens that externalities hit the company and thereby damage.

Amount of External Costs

The real difficulty is the exact amount of the external costs. In general, it is very difficult to define the amount of external costs. First of all, it is extremely difficult to find out which costs are an external effect and which costs would arise in any case. As a result, it is usually very difficult for the state to determine the cause for the externalities.

Externalities mean Market Failures

If there is externalities in an economy, you can basically say that the price mechanism has failed . As a result, a market failure occurs and the state is more or less compelled to intervene in the event. Especially in a social market economy, it is ultimately impossible for a company to simply harm other market participants, such as the company or other companies, without a corresponding compensation. In principle, here too, of course, the polluter pays principle applies: The person responsible for the externalities must be held accountable and justified for his actions.

Briefly Summarized:

• Externalities affect uninvolved market participants


• Externalities are basically a form of market failure as the price mechanism has failed


• Externalities can only be very difficult to assign to the polluter


• The amount of externalities can usually only be estimated


• There are positive and negative externalities
  


• Causes of externalities are mostly companies with particularly pronounced profit orientation

Perfect Competition

The principle of perfect competition is a theoretical idea in the economy, which in this form will probably not exist in the longer term.

In order for the condition of perfect competition to be fulfilled, certain conditions must be fulfilled. Both supply and demand are balanced in this market. It is assumed that there are always enough buyers who want to buy the product. At the same time, it is assumed that the supplier does not have to go under his price pain threshold because the demand is permanently high enough.

But what are the prerequisites for full competition and why is this form of competition so remote and therefore just a theoretical model?

Conditions for Perfect Competition

Complete competition requires that no company involved in the market has a market power and that no company has a significant impact on market prices . Moreover, a condition that must be fulfilled is that it must be homogeneous goods. This means that the products of the different suppliers are nearly identical and comparable to the customers. Not many products meet this requirement. An exception could be gasoline, for example. Because the quality of the fuel of a variety is always the same, it does not matter to the customer where he buys the product. The reality, however, is that most of the goods are not homogeneous, since there are, for example, differences in quality.

In addition, there must be a large number of suppliers and buyers in the competition. The consequence of this is that the action of the individual has no influence on the market price. If, for example, there are 1,000 vendors and a million customers, it is irrelevant whether there are only 999 vendors and 998,000 vendors in the next month. The situation would be different if there were only ten suppliers for the number of customers. Then a vendor would more or less have an influence on the market price.

The last condition, which must be fulfilled in perfect competition, is the market transparency , which must be present. This means that every market participant must know which goods are offered and demanded by whom and at what price. A truly theoretical assumption, which in reality is mostly only fulfilled on the stock exchange .

Reality of Perfect Competition

Since one can only speak of a complete competition, if all of the above-mentioned conditions are fulfilled without exception and in full, this model is to be described as very realistic. In reality, it would not be possible. This is much more a theoretical model, an ideal.

Briefly Summarized:

• Perfect competition is a theoretical and realistic ideal


• It is assumed that these are homogeneous, comparable goods (for example gasoline)


• It is assumed that there are a large number of buyers and sellers


• It is assumed that there is a complete market transparency.

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