Chapter 26: Technology, R&D, and Efficiency

1. Chapter 26: Technology, R&D, and Efficiency • Technological Advance: New and better goods & services or new and better ways of producing/distributing them • For economists, technological advance occurs over the very long run, where technology can change and in which firms can develop and offer entirely new products Prof. Ana Corrales ECO 2023 Notes

2. Invention • The discovery of a product or process through the use of imagination, ingenious thinking and experimentation, and the first proof that it will work Prof. Ana Corrales ECO 2023 Notes

3. Innovation • The first successful commercial introduction of a new product, the first use of a new method, or the creation of a new form of business enterprise • Production Innovation • Process Innovation Prof. Ana Corrales ECO 2023 Notes

4. Diffusion • The spread of an innovation through imitation or copying Prof. Ana Corrales ECO 2023 Notes

5. Research & Development Expenditures • Business expenditures which include direct efforts toward invention, innovation and diffusion • Government also invests in R & D • US Total (2002) was $292 billion, 2.79 percent of GDP • Global Perspective 26.1 • Japan is ahead of US R&D Prof. Ana Corrales ECO 2023 Notes

6. Role of Entrepreneurs and Other Innovators • An entrepreneur is the initiator, innovator, and risk bearer • Can be a entrepreneurial team • Other innovators are those involved in the pursuit of innovation, not bearing personal financial risk • At the heart of why innovators are successful is because they have some ability to anticipate the future • Start-ups focus on creating and introducing a new product or employing a new production or distribution technique • Innovation also occurs within existing organizations Prof. Ana Corrales ECO 2023 Notes

7. Exploiting University and Government Scientific Research • Entrepreneurs study the scientific output of university and government laboratories to identify discoveries with commercial applicability • The separation between university scientists and innovators is narrowing • Scientists and universities increasingly realize their work may have commercial value  team up with innovators to share in potential profit Prof. Ana Corrales ECO 2023 Notes

8. Patents • Some technological breakthroughs (inventions) can be patented • Once patented, inventions cannot be legally imitated for two decades Prof. Ana Corrales ECO 2023 Notes

9. Copyrights & Trademarks • Copyrights protect publishers of books, computer software, movies, videos and musical compositions from having their works copied • Trademarks give the original innovators of products the exclusive right to use a particular product name • By reducing the problems of direct copying, these legal protections increase the incentive for product innovation • Strengthened worldwide through international trade agreements Prof. Ana Corrales ECO 2023 Notes

10. Innovation in Pure Competition • Strong competition provides an incentive for firms to innovate • Competitive firms are less complacent than monopolies • In pure competition markets, there is continued pressure to improve products and lower costs through innovation • Where there are competing firms, there is less likelihood that an innovative product or process will be overlooked Prof. Ana Corrales ECO 2023 Notes

11. Innovation in Monopolistic Competition • Monopolists have strong profit incentive to engage in product innovation • New products may increase monopoly power and economic profit Prof. Ana Corrales ECO 2023 Notes

12. Innovation in Oligopolies • Due to their size, oligopolies can often finance large R&D costs associated with product or process innovation • Existence of barriers to entry gives oligopolist assurance of maintaining profit gained through innovation Prof. Ana Corrales ECO 2023 Notes

13. Innovation in Pure Monopolies • In general, they have little incentive to engage in R&D, as they maintain a high profit through entry barriers • For a monopolist, the incentive to innovate is defensive, to limit the probability that a new product or process will destroy its monopoly power • Market structure least conducive to innovation Prof. Ana Corrales ECO 2023 Notes

14. Creative Destruction • Creation of new products and new production methods simultaneously destroys the monopoly market positions of firms committed to existing products or methods • An innovator will automatically displace any monopolist who no longer delivers superior performance (Joseph Schumpeter) Prof. Ana Corrales ECO 2023 Notes

15. Ch. 26 Study Questions • 1 • 2 • 10 Prof. Ana Corrales ECO 2023 Notes