Technological advance: invention, innovation, and diffusion.

       In economics technological advantage is new and better goods and services and new and better ways of producing or spreading them. This process occurs over a theoretical time called very long run, than can be as short as few weeks or as long as many years. Let’s recall that in all our market systems (pure competition, monopolistic competition, oligopoly and pure monopoly), the short run is a period in which technology, plant are fixed, however in the long run , technology is constant but the firms can change their plant size and are free to enter and exit the industry. In contrast, very long run is a period in which technology can change and firm can develop and supply totally new products.
   It’s known that technological advantage shifts product possibility curve upward, enabling economy to achieve more goods and more services. Technological advantage can be is made up of three parts: invention, innovation, and diffusion.
 Invention
   The first step to technological advantage is invention: the discovery of product or process of producing by using imagination, thinking and experimenting. Invention is a process and the result of it is also called invention. Invention is based in scientific knowledge and it is the result of work of individuals who work on their own or as members of Research and Development (R&D) departments in firms. Government encourages invention by providing patents, right to sell any innovative process of production, machines or products in a set time.
Innovation
Innovation is directly related to invention. While invention is “discovery and proof of workability”, innovation is the successful introduction of new product (invention) in the market, the first use of a new method of producing, or the creation of new form of business firm. There are two types of innovation: product innovation, improving products and services, and process innovation, which is improved ways of production and spreading of these inventions in the market.
In contrast to invention, innovations cannot be patented. Innovation needs not to weaken or destroy the existing firms. Because new products and processes threaten firms’ survival, existing firms have a high incentive to engage into research and development (R&D) process continuously. These innovative products and processes enable firm to earn higher revenue or to maintain the present ones. Innovation can strengthen or weaken market power.
 Diffusion
   Diffusion is the process of spreading of inventions through imitating or copying. To take the advantage of new profits or to slow down disappearing of others, all firms try to implement the innovations. In most of the cases innovation leads to widespread imitation (that’s diffusion) of inventions. For example, soon after McDonald’s introduced the fast-food hamburger, Burger Kings also started to produce it, since it offered high revenues for the firms that supplied this good.
Research and Development (R&D) Expenditures
When it’s related to business research and development means the efforts towards inventions, innovations and diffusion. Many countries engage in R&D of national defense, so that annually they spend thousands of billions of dollars.
Importance of Technological Advantage
   Technological advances for many centuries were viewed ad external to economies, like a force to which economies adjust. Periodically new advances in scientific and technological knowledge occurred. Firms and industries, incorporated new technology into their products and production process to increase or to maintain their revenues. After making some adjustments, they continue to settle into long-run equilibrium position. Economists believe that technological advantage is related to advance of science, which is very important for market system. Some of economists see capitalism is the as driving force of technological advantage. Technological advantage arises from rivalry among individuals and firms that motivates them to seek and exploit new opportunities of profit and of expanding. This rivalry occurs between new firms and existing ones. Entrepreneurs and innovators are viewed as heart of technological advantage.

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Pure Monopoly

   Pure monopoly happens when one firm is the single supplier of a product for which there are not substitutes. Some of the main characteristics of pure monopoly are:

• Single Seller– A pure monopoly is an industry in which a sole producer is the single supplier of a specific good or service in this market model.
• No Close Substitutes– A pure monopoly’s product is unique and there aren’t any close substitutes for it, so that consumer has to choose to buy or not to buy the product.
• Price-maker– The pure monopolist controls the quantity supplied of good and service, so that it controls the price.  This kind of firm or industry is called price-maker, unlike pure competitors which are price-taker, because they can’t control the price, since quantity produce by them is very small relative to total quantity output. The pure monopolist confronts downward-sloping curve.  So it can change the product’s price by changing the quantity of good that it produces. The monopolist can use this advantage to maximize its profits.
• Blocked entry– A pure monopolist doesn’t have any competitors because there are some barriers that keep competitors away from entering the industry. These barriers may be technological, economical or some other types, but the fact remains that no other firms may enter in our pure monopoly market.

 There are very rare examples of pure monopoly, but there are examples of some less pure forms of it. In many countries many government-owned or government regulated public utilities (gas, water, electricity) may be monopolies. Also, some professional sport teams are thought to be monopolies, because they are suppliers of unique service in large geographic areas. Examples may serve some major football matches like between Real Madrid and Barcelona in Spain, which serve as representative of large cities in Spain.  In some small towns airline service or train-transport may be pure monopolies if they are represented only by one firm in these regions. Also, in some very small areas banks, pharmacies or theaters may be examples of pure monopolies.

THE CIRCULAR FLOW MODEL with Government

In the following figure we have integrated government. What have changed?

Flows (5) through (8) illustrate that government make purchases in resource and product market. Flows (5) and (6) represent buying of products, but (7) and (8) represent buying of resource by government.

Government shall have money to pay its members, teachers, police, inspectors, bus drivers, doctors, fire fighters etc. Government might buy land to build a new school, expand a hospital.

Government offers public goods and services to both households and businesses, as shown by (9) and (10). Government gets paid for these goods and services by collecting taxes by flows (11) and (12).  Flow (11) represents different subsidies to airlines, doctors which are then paid back to government, because most of them are low-interest loans, taxes, or public facilities provided at prices below their real price. Flow (12) includes taxes collected by government from households and different kind of social insurance benefits offered by government. The structure of taxes and transfer payments affects income distribution. In flow (12), taxes drawn from “rich” households, combined with a system of transfer payments to low-income households, reduces income inequality.

Flows (5) through (8) imply that government takes away resources from private sector or use,  and directs them to constructing public goods. This resource reallocation is required for producing public goods and services.

“Invisible hand” in economics

“Invisible Hand” in Economics
Firms and resource suppliers want to increase their revenue and seek their own self-interest, so that they are like guided by an “invisible hand”. In this environment businesses are the least costly producers of goods and services, because this is their interest is to get higher revenues. In the same way, using few resources to produce goods is in interest of demanders.
Businesses want to make higher profits; resource suppliers want higher rewards, so both of them manipulate resources usage order to get best allocation of them for the entire society.
Competition of self-interests unintentionally furthers fulfilling of society’s needs. The “invisible hand” maximizes profits of firms and also it maximizes the output and wish-fulfillment.
Most important characteristics of market system are:

• Efficiency– Market system produce only that goods and services that are most demanded by society. It forces using the most efficient techniques of production, so that in increases the total output.
• Incentives– Market system requires hard-work and innovation. So ones who are working a lot, get better results and efficiency, so that they also get higher revenues. Implementation of new efficient production techniques also offers higher revenues.
• Freedom-Firms and industries can enter or leave the industry when they want. Entrepreneurs and labour force are free to seek their own self-interest, so that they may get better results or big losses.

Key Terms:
Invisible Hand-The ten­dency of firms and resource suppliers seeking to further their own self-interests in com­petitive markets to also promote the interests of society as a whole.

Market System

   Market system is an institution or organization that brings buyers and sellers together. There are some special characteristics which enable a good functioning of it: freedom of enterprise and choice, limited role of government, private property, competition and self-interest as the dominant motive of market’s existence.

 

Freedom of enterprise and choice
   In order market system to exist all economics units have to make choices which are expressed in market’s economy. Freedom of enterprise allows entrepreneurs and firms are able to obtain the resources they need and produce the goods they are willing, and have the ability all these goods in the market of their choice. Freedom of choice ensures that owners of firms are able to employ and dispose their property and their financial resources as they want. It allows workers to get the job they are specialized for. In the last case, it enables buyers to get the good they are willing and able to pay for.

 Limited Role of Government
   In market system government should be active but it has a limited role, since markets are managed by “invisible hand”. However, there are some problems, like spillover costs, that can’t be solved if government isn’t activating.

 Private Property
   This characteristic of market system is one of the most important, because individuals and firms, not government, owe most of land and capital that gives capitalism its name. The right of private property enables the individuals to use their entrepreneurial ability and resources as they see fit.
This right acts as an incentive because it encourages investment, exchange, expanding of business, innovation. Property rights facilitate exchange between two people, because it ensures who is legitimate owner of sold item. Property rights enable people to use their time and resources to produce more goods and services, than to protect property that they have already produced.

Competition
   The market system promotes competition among economic units. Competition requires:

• Independent buyers and sellers.
• Freedom of seller and buyer to enter of leave the market when they want.

When there are independently acting sellers and buyers nobody can dictate the price of a good. If a seller can restrict total supply of a good, then he can control the price of it. However, this situation is impossible to occur in a market where suppliers compete. An economic unit that raises the price in this case may lose a part or whole its production and revenue to other suppliers.
Competition also implies that a producer can enter or leave an industry. This characteristic offers efficiency to our market system. Freedom of entry and exit helps economy to adjust to demand, taste and resource availability. Competition is the most important regulation force in market system.

Self-Interest
   In market system self-interest isn’t selfishness, but motivating force for all economic unit to produce the goods and services they want and that will offer more revenue to them. This means that suppliers will try to do what is the best for them. Entrepreneurs try to maximize revenue and to diminish loss. Workers try to maximize job benefit by finding the job that offers a best combination of wage, working conditions and less working time. Consumers want to get what they need at lowest price and relative highest quality, so maximize utility of good they bought.

   Market system is an organizing mechanism. It elaborates a network through which individual’s choices are recorded, summarized and balanced. Ones who obey the market rules are rewarded with greater revenue, others are penalized and support high loss. Through this mechanism society dictates what economy should produce, what will be the price of goods sold and how the production can be organized.

Key Terms:
Private Property-The right of private persons and firms to obtain, own, control, employ, dispose of, and bequeath land, capital, and other property.
Freedom of Enterprise-The freedom of firms to obtain eco­nomic resources, to use these resources to produce products of the firm’s own choosing, and to sell their products in markets of their choice.
Freedom of Choice- The freedom of owners of property resources to employ or dispose of them as they see fit, of workers to enter any line of work for which they are qualified, and of consumers to spend their incomes in a manner that they think is appropriate.
Self-interest-That which each firm, property owner, worker, and consumer believe is best for itself and seeks to obtain.
Competition-The presence in a market of a large number of inde­pendent buyers and sellers competing with one another and the freedom of buyers and sellers to enter and leave the market.