Micro Chapter 13 W

allocative efficiency with technological advance

a more-preferred mix of goods and services; increases utility

modern view of technological advance

capitalism is the driving force, profit is the incentive, rivalry among firms is the cause, starts from within the company

optimal amount of R&D

compare marginal benefit and cost, where MB=MC or r=i

imitation problem

competitors may imitate innovation and reduce profit potential

R&D Expenditures

direct efforts toward invention, innovation, and diffusion

invention

discovery of new product or process through the use of imagination, ingenious thinking, and experimentation

role of oligopoly

economic profit can finance R&D; barriers to entry can foster R&D due to long run profit; economies of scale allow firm to spread R&D cost over large output; firms may not pursue new products that would render existing products obsolete

marginal benefit

expected rate of return "r" from last dollar spent on R&D

innovation

first successful commercial introduction of a new product, the first use of a new method, or the creation of a new business enterprise

role of monopolistic competition

incentive to differentiate but profits are temporary

role of pure competition

incentive to innovate to improve products and lower costs, but rate of return is low due to ease of entry; small firm size and normal long run profits mean these firms may not be able to finance R&D

productive efficiency with technological advance

increasing productivity of inputs, reducing ATC; shifts PPC outward

entrepreneurs

initiator, innovator, risk bearer

marginal cost

interest-rate cost-of-funds: bank loans, bonds, retained earnings, venture capital, personal savings cost of funds (interest rate) is the same regardless od the source or amount of funds

other innovators

key people involved in the pursuit of innovation who do not bear personal financial risk; sometimes referred to as intrapreneurs since they provide the spirit of entrepreneurship within existing firms

fast-second strategy

let smaller firms innovate, the imitate or acquire smaller firm

role of pure monopoly

little incentive to innovate due to strong barriers to entry protecting profits

technological advance

new and better products; better ways of producing and distributing those products; occurs over the very long run; profit is the incentive

inverted U theory of R&D

relationship between market structure and technological advance; R&D spending is weak at low and high industry concentrations; reaches a peak at 50%; loose oligopoly is the optimal structure for R&D spending; empirical evidence generally supports the theory

expected-rate-of-return curve

slopes downward due to diminishing returns for R&D expenditures; expected, not guaranteed returns

diffusion

spread of innovation through imitation or copying; firms embed new innovation; crucial to capitalism