11W McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Technology, R&D, and Efficiency

11W-2 LO1 New and better products Better ways of producing and distributing those products Occurs over the very long run Incentive - the pursuit of profits Invention, Innovation and Diffusion

11W-3 Short Run No change in technology, plant or equipment Long Run No change in technology Very Long Run Technology changes by R&D LO1 Invention, Innovation and Diffusion

11W-4 Invention, Innovation and Diffusion Invention – New product or process Based on scientific knowledge Patent protection Innovation Product or process innovation Can’t be patented Diffusion – Spread of innovation through imitation or copying LO1

11W-5 R&D Expenditures Applied Research (invention) 20% Development innovation and imitation 75% Basic Research 5% Science Resource Statistics, National Science Foundation LO2

11W-6 Modern View of Technological Advance Capitalism – driving force Profits – incentive Rivalry among firms – cause Starts from within the economy Internal to capitalism Old view – A random event from outside the economy LO3

11W-7 Role of Entrepreneurs Initiator, innovator and risk bearer Other innovators Forming start-ups Innovating within existing firms Anticipating the future Exploiting university and government scientific research LO3

11W-8 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 Expected rate of return LO3

11W-9 Expected Rate of Return – r Marginal benefit from R&D Slopes downward – diminishing returns for R&D expenditures Optimal vs. affordable R&D Expected not guaranteed returns Adjustments LO4 A Firm’s Optimal Amount of R&D

11W-10 A Firm’s Optimal Amount of R&D 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

11W-11 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

11W 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 A Firm’s Optimal Amount of R&D

11W-13 Increased Profit via Innovation Increased revenue via product innovation Importance of price Unsuccessful new products Product improvements Reduced cost through product innovation LO4

11W-14 Product A Price=$1 Plot Points to Create Graph… Product B Price= $2New Product C Price= $4 Utility Maximization with the Introduction of a New Product (Income = $10) 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) Increased Profit via Innovation LO4

11W-15 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 Increased Profit via Innovation LO4

11W-16 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

11W-17 Role of Market Structure Pure competition Incentive to innovate, but rate of return is low Monopolistic competition Incentive to differentiate, but profits are temporary LO5

11W-18 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 LO5

11W-19 Inverted U Theory of R & D R&D Expenditure as a Percentage of Sales Concentration Ratio (Percent) More Competition Less Competition A “loose” oligopoly supports the optimum R&D spending LO5

11W-20 Technological Advance and Efficiency Productive efficiency Increasing productivity of inputs Allocative efficiency A more-preferred mix of goods and services Creative destruction LO6