Chapter 13W - LAWRENCE MCNEIL, PH.D.

Chapter 15 Technology, R&D, and Efficiency Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. Technological Advance Technological advance New and better products Better ways of producing and distributing those products Occurs over the very long run LO1 Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 15-2 The Very Long Run Short run No change in technology, plant, or equipment Long run No change in technology Very long run Technology changes with R&D

LO1 Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 15-3 Invention and Innovation Invention New product or process Based on scientific knowledge Patent protection Innovation Product innovation Process innovation Cant be patented LO1 Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 15-4 Diffusion Diffusion Spread of innovation through imitation or copying

Firms embed new innovation Crucial to capitalism Requires R&D expenditures LO1 Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 15-5 Total R&D Expenditures LO1 Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 15-6 R&D Expenditures by Firms LO1 Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 15-7

Modern View of Technological Advance Capitalism is the driving force Profit is the incentive Rivalry among firms is the cause Starts from within the economy Internal to capitalism Old view was a random event from outside the economy LO1 Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 15-8 Role of Entrepreneurs Initiator, innovator, and risk bearer Forming start-ups Other innovators Innovating within existing firms Anticipating the future Exploiting university and government scientific research LO2

Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 15-9 A Firms 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 curve LO3 Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 15-10 Interest-Rate Cost-ofFunds InterestRate Cost of Funds, % 20

$10 8 16 20 8 30 8 40 8 50 8 60 8

70 8 80 8 Interest rate, i (percent) R&D Millions Interest-rate cost-offunds curve 12 i 8 4 0 20

40 60 80 100 R&D expenditures (millions of dollars) LO3 Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 15-11 The Optimal Amount of R&D Expected rate of return r Marginal benefit from R&D Expected-rate-of-return curve Slopes downward due to diminishing returns for R&D expenditures Expected not guaranteed returns Adjustments Optimal amount of R&D LO3 Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 15-12

R&D Millions Expected Rate of Return, % $10 18 20 16 30 14 40 12 50

10 60 8 70 6 80 4 Expected rate of return, r (percent) Expected Rate of Return 20 Expected-rateof-return curve 16 12 8 4

0 r 20 40 60 80 100 R&D expenditures (millions of dollars) LO3 Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 15-13 Expected Rate of Return, % R&D Millions Interest Rate Cost of funds, %

18 $10 8 16 20 8 14 30 8 12 40 8 10

50 8 8 60 8 6 70 8 4 80 Expected rate of return, r, and Interest rate, i (percent) Optimal R&D Expenditures 20

16 12 r=i 8 4 0 20 40 60 80 100 R&D expenditures (millions of dollars) LO3 Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 15-14 Increased Profit via Product Innovation Increased revenue via product innovation Importance of price Unsuccessful new products Product improvements Reduced cost through product innovation

LO4 Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 15-15 Increased Profit with New Product 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 10 10/1=10 24 24/2=12 52 52/4=13 Second 8

8/1=8 20 20/2=10 48 48/4=12 Third 7 7/1=7 18 18/2=9 44 44/4=11 Fourth

6 6/1=6 16 16/2=8 36 36/4=9 Fifth 5 5/1=5 12 12/2=6 32 32/4=8

With $10 and choice of A and B (2A, 4B) LO4 With $10 and choice of A, B or C (1B, 2C) Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 15-16 Reduced Costs via Process Innovation 2500 TP1 2000 0 1000

Units of labor Upward shift of the total product curve LO4 Average total cost Total product TP2 ATC1 ATC2 $5 4 0 2000 2500 Units of output Downward shift of the average total cost curve

Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 15-17 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 Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 15-18 U.S. Patents by Foreign Firms LO5

Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 15-19 Imitation and R&D Expenditures LO5 Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 15-20 Role of Market Structure Pure competition Incentive to innovate, but rate of return is low Monopolistic competition Incentive to differentiate but profits are temporary LO6 Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 15-21

Role of Market Structure Continued 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 LO6 Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 15-22 Inverted-U Theory of R&D Inverted-U theory of R&D Firms R&D spending rises with the industry concentration ratio Reaches a peak at 50% Declines after 50% Empirical evidence generally supports this theory

LO6 Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 15-23 Inverted-U Theory R&D expenditure as a percentage of sales More competition 0 LO6 Less competition 25 50 75 Concentration ratio (percent) 100 Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

15-24 Technological Advance and Efficiency Productive efficiency Increasing productivity of inputs Allocative efficiency A more preferred mix of goods and services Creative destruction LO7 Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education. 15-25 Decline in Federal R&D Spending Government spends on basic scientific research Benefits not realized for many years Private business prefers R&D that can be profitable quicker Federal spending on basic scientific research as

a % of the budget has declined Now consumption spending by government is favored over investments in scientific research 15-26 Copyright 2018 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education.

Recently Viewed Presentations

  • PSICOLOGIA DINAMICA - Unical

    PSICOLOGIA DINAMICA - Unical

    di sentimenti e desideri erotici ed aggressivi inconciliabili con la sua morale, la sua cultura e la sua educazione. Pur essendo al corrente del ruolo delle pulsioni sessuali nelle nevrosi, Breuer. rifiutò di riconoscere il ruolo fondamentale che esse hanno...
  • The Stereoscopic Holographic Dictionary JAMES SULLY B. Czech,

    The Stereoscopic Holographic Dictionary JAMES SULLY B. Czech,

    What is the lesson from Ryu-Takayanagi? The CFT sees the bulk geometry naturally through codimension-2 minimal surfaces. Boundary conditions are codimension-2 surfaces on the CFT cylinder. One could define the relevant . loop space . to be . all possible...
  • INVESTMENT PRODUCTS: NOT FDIC INSURED  NOT BANK GUARANTEE

    INVESTMENT PRODUCTS: NOT FDIC INSURED NOT BANK GUARANTEE

    Did you know that a 65-year-old man has a 40% chance of living beyond age 85? Also, if a husband and wife are both age 65, there's a 72% chance that one spouse will live beyond age 85.* ... Inflation...
  • Chapter 13 Characterizing Viruses, Viroids, and Prions

    Chapter 13 Characterizing Viruses, Viroids, and Prions

    Chapter 13 Characterizing Viruses, Viroids, and Prions. Not all pathogens are cellular! ... Figure 13.17 Viral plaques in a lawn of bacterial growth on the surface of an agar plate. Bacterial lawn. ... Chapter 13 Characterizing Viruses, Viroids, and Prions
  • A walk through the Universe - Institute of Physics

    A walk through the Universe - Institute of Physics

    A walk through the Universe Space is big. You just won't believe how vastly, hugely, mind-bogglingly big it is. I mean, you may think it's a long way down the road to the chemist's, but that's just peanuts to space.
  • Brown & Toland Medical Group - Global Health Care

    Brown & Toland Medical Group - Global Health Care

    Brown & Toland Medical Group Health Care Information Technology 2004 Stan Padilla, MD Vice-President, Medical Services Chief Medical Officer Presentation Overview Organization Overview Disease Management and Implementation of EMR Effective Strategies Results Challenges to Success Organization Overview Independent Physician Association...
  • Updates on CVOT Data and Clinical Comparisons That Matter

    Updates on CVOT Data and Clinical Comparisons That Matter

    EMPA-REG OUTCOME CV Outcome Trial:Empagliflozin Reduced CV Mortality . Heart Failure Outcomes With Empagliflozin. Canagliflozin Reduced MACE Similarly to Empagliflozin in the CANVAS CV Outcome Trial. Cardiorenal Benefit With SGLT2 Inhibitors.
  • HELP! IM AN ARTS GRADUATE. HOW DO I

    HELP! IM AN ARTS GRADUATE. HOW DO I

    consider the challenges faced by our English for Specific Academic Purposes (ESAP) teachers working with research students in unfamiliar disciplines. explore what PhD students want in feedback on writing. experience a genre analysis activity used in ICTE-UQ's English for Academic...