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

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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
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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 it’s 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.
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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.
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4 R&D share of GDP, 1981-2006 0 0.5 1 1.5 2 2.5 3 3.5 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 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
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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
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6 Example: an innovation in  production A firm has invented something that brings ATC down.
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  • Spring '07
  • Hansen
  • Microeconomics, INNOVATION Innovation, Definition Definition Definition, competition Innovation

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