1. 11W McGraw-Hill/IrwinCopyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved. Technology, R&D, and Efficiency

2. 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

3. 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

4. 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

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

6. 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

7. 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

8. 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

9. 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

10. 11W-10 A Firm’s Optimal Amount of R&D 20 16 12 8 4 0 20 40 60 80 100 Interest Rate, i (Percent) R&D Expenditures (Millions of Dollars) i Interest-rate cost-of- funds curve R&D Millions $10 20 30 40 50 60 70 80 Interest- Rate Cost of Funds, % 8888888888888888 LO3

11. 11W-11 A Firm’s Optimal Amount of R&D 20 16 12 8 4 0 20 40 60 80 100 Expected Rate of Return, r (Percent) r Expected- rate-of- return curve R&D Millions $10 20 30 40 50 60 70 80 Expected rate of return, % 18 16 14 12 10 8 6 4 R&D Expenditures (Millions of Dollars) LO3

12. 11W-12 20 16 12 8 4 0 20 40 60 80 100 R&D Expenditures (Millions of Dollars) Expected rate of return, % R&D Millions Interest Rate cost of funds, % 18 16 14 12 10 8 6 4 $10 20 30 40 50 60 70 80 88888888888888 Expected Rate of Return, r, and Interest Rate, i (Percent) r = i LO3 A Firm’s Optimal Amount of R&D

13. 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

14. 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

15. 11W-15 Total Product Average Total Cost Units of Labor Units of Output 2500 2000 1000 TP 1 TP 2 ATC 1 ATC 2 2000 2500 $5 0 4 0 Upward shift of the total product curve Downward shift of the average total cost curve Increased Profit via Innovation LO4

16. 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

17. 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

18. 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

19. 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 0 25 50 75 100 LO5

20. 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