Technology, R&D, and Efficiency Chapter 13W Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

13W-2 Invention, Innovation, and Diffusion New and better products Better ways of producing and distributing those products Occurs over the very long run Profit is the incentive LO1

13W-3 Invention, Innovation, and Diffusion Short run No change in technology, plant, or equipment Long run No change in technology Very long run Technology changes with R&D LO1

13W-4 Invention, Innovation, and Diffusion Invention New product or process Based on scientific knowledge Patent protection Innovation Product innovation Process innovation Can’t be patented LO1

13W-5 Invention, Innovation, and Diffusion Diffusion Spread of innovation through imitation or copying Firms embed new innovation Crucial to capitalism Requires R&D expenditures LO1

13W-6 Global Perspective LO1

13W-7 Applied research (invention) 15% R&D Expenditures LO1 Development (innovation and imitation) 80% Basic research 5%

13W-8 Modern View of Technological Advance Technological advance Capitalism is the driving force Profit is the incentive Rivalry among firms is the cause Starts from within the economy Internal to capitalism Old view was a random event from outside the economy LO1

13W-9 Role of Entrepreneurs Initiator, innovator, and risk bearer Forming start-ups Other innovators Innovating within existing firms Anticipating the future Exploiting university and government scientific research LO2

13W-10 A Firm’s Optimal Amount of R&D Marginal benefit and marginal cost Interest-rate cost-of-funds Bank loans Bonds Retained earnings Venture capital Personal savings Interest-rate cost-of-funds curve LO3

13W Interest rate, i (percent) R&D expenditures (millions of dollars) i Interest-rate cost-of- funds curve R&D Millions $ Interest- Rate Cost of Funds, % LO3 A Firm’s Optimal Amount of R&D LO3

13W-12 A Firm’s Optimal Amount of R&D Expected rate of return “r” Marginal benefit from R&D Expected-rate-of-return curve Slopes downward due to diminishing returns for R&D expenditures Expected not guaranteed returns Adjustments Optimal amount of R&D LO3

13W-13 A Firm’s Optimal Amount of R&D Expected rate of return, r (percent) r Expected-rate- of-return curve R&D Millions $ Expected Rate of Return, % R&D expenditures (millions of dollars ) LO3

13W-14 A Firm’s Optimal Amount of R&D R&D expenditures (millions of dollars) Expected Rate of Return, % R&D Millions Interest Rate Cost of funds, % $ Expected rate of return, r, and Interest rate, i (percent) r = i LO3

13W-15 Increased Profit via Innovation Increased revenue via product innovation Importance of price Unsuccessful new products Product improvements Reduced cost through product innovation LO4

13W-16 Increased Profit via Innovation Unit of Product Marginal Utility, Utils Marginal Utility per Dollar (MU/Price) Marginal Utility, Utils Marginal Utility per Dollar, MU/Price) Marginal Utility, Utils Marginal Utility per Dollar, MU/Price) First 1010/1=102424/2=125252/4=13 Second 88/1=82020/2=104848/4=12 Third 77/1=71818/2=94444/4=11 Fourth 66/1=61616/2=83636/4=9 Fifth 55/1=51212/2=63232/4=8 With $10 and choice of A and B (2A, 4B) With $10 and choice of A, B or C (1B, 2C)

13W-17 Increased Profit via Innovation Total product Average total cost Units of labor Units of output TP 1 TP 2 ATC 1 ATC $ Upward shift of the total product curve Downward shift of the average total cost curve LO4

13W-18 Imitation and R&D Incentives Imitation problem Fast-second strategy Benefits of being first Patents, copyrights, and trademarks Brand-name recognition Trade secrets and learning by doing Time lags Profitable buyouts LO5

13W-19 Global Perspective LO5

13W-20 Imitation and R&D Incentives LO5

13W-21 Role of Market Structure Pure competition Incentive to innovate, but rate of return is low Monopolistic competition Incentive to differentiate but profits are temporary LO6

13W-22 Role of Market Structure Oligopoly Large size Ability to finance R&D Barriers to entry can foster R&D Complacency is a negative Pure monopoly Little incentive to innovate due to strong barriers to entry protecting profits LO6

13W-23 Inverted U Theory of R&D Firms’ R&D spending rises with the industry concentration ratio Reaches a peak at 50% Declines after 50% Empirical evidence generally supports this theory LO6

13W-24 Inverted U Theory of R&D R&D expenditure as a percentage of sales Concentration ratio (percent) More competition Less competition LO6

13W-25 Technological Advance and Efficiency Productive efficiency Increasing productivity of inputs Allocative efficiency A more-preferred mix of goods and services Creative destruction LO7

13W-26 Decline in Federal R&D Spending Government spends on basic scientific research Benefits not realized for many years Private business prefers R&D that can be profitable quicker Federal spending on basic scientific research measured as a % of the budget has declined Now consumption spending by government is favored over investments in scientific research