L26 - 1 Economics 101:Principles of Microeconomics...

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Unformatted text preview: 1 Economics 101:Principles of Microeconomics Professor Jo Hertel Lecture 26: Innovation Why we care about innovation Innovation and competition Innovation and the government: patents and the problems with patents The arms race model of innovation A first look at modeling uncertainty 2 Why we care about innovation Source: Federal Reserve Banks of Dallas, Annual Report 1997 Advances in technology increase the productivity of labor. This has two effects on standard of living: The worker can buy more with a minute of labor as its worth more (even if prices stayed the same); and all goods he can buy can be produced more cheaply. This is why innovation is called the motor of growth. 3 Innovation and technology Technological innovation is arguably the single most important determinant of growth. There are several ways in which government intervenes in the innovation market (patents, subsidies, sponsoring research) why? Innovation is also a public good (long run) hence the subsidies & the public provisions. Innovation is in some ways helped and in some ways hindered by competition patents try to counter the negative effects. 4 R&D share of GDP, 1981-2006 0.5 1 1.5 2 2.5 3 3.5 1 9 8 1 1 9 8 3 1 9 8 5 1 9 8 7 1 9 8 9 1 9 9 1 1 9 9 3 1 9 9 5 1 9 9 7 1 9 9 9 2 1 2 3 2 5 United States Japan Germany France United Kingdom Italy Canada Russian Federation Source: National Science Foundation, National Patterns of R&D Resources: 2006 Data Update International research and development expenditures as percentage of GDP 5 Competition and innovation Competition helps innovation: the drive to bring costs down/ new products to the market in order to survive Competition also hinders innovation: if the innovation is adapted by competitors, the profits erode quickly and the firm does not recoup its R&D outlay. Patents prevent the second effect for some time: they create monopolies to allow profits from innovation This is not efficient ex post, but is needed ex ante 6 Example: an innovation in production A firm has invented something that brings ATC down....
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L26 - 1 Economics 101:Principles of Microeconomics...

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