ch6notes - Growth and Ideas Objects Physical Entities;...

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Growth and Ideas Objects Physical Entities; Capital, Labor, etc. All of the atoms in the universe Limited in size and number Ideas Instructions for using objects Essentially unlimited in number Can be applied forever Examples Germs cause diseases → sanitation saves lives. Spinning magnets can generate electricity.
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Nonrivalry Only one person can use a specific object at one time. Everyone can simultaneously use the same idea. Existing ideas are not subject to scarcity. Once an idea is created, its use is unlimited. Definition of Increasing Returns Doubling inputs more than doubles output. Standard replication argument does not apply. Example: Pharmaceuticals Two drug factories → twice as much produced. But – formula for the drug need only be developed once. Twice as much of the drug costs less than twice as much. Two formulas and two factories → extra developed drug.
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Develop a new drug for $800 million. Production costs $10 per pill. First 80 million pills cost $1600 million. Second 80 million pills cost $800 million. After the invention has been made, constant returns to scale. Including the cost of the idea, increasing returns to scale.
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Marginal cost pricing: Antibiotic sells for $10 per pill. Post-idea, this is feasible. However, there is no incentive to develop the pill. Increasing returns requires: Patent protection Subsidies to develop new ideas Perfect competition is not feasible. Production will not be Pareto Optimal.
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This note was uploaded on 07/17/2008 for the course ECON 502.02 taught by Professor Mccafferty during the Spring '08 term at Ohio State.

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ch6notes - Growth and Ideas Objects Physical Entities;...

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