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1.4.8a Invention, innovation and production (A-level only)

Invention Creates the Idea; Innovation Brings It to Market

Definition

Invention: the creation of a new product or production process, the original idea or discovery.

Innovation: the process of bringing a new or improved product or method of production to the market, turning an invention into commercial use.

  1. The two form a sequence: invention creates the idea, then innovation turns it into a product or method people actually use.
  2. Many inventions never become innovations, because reaching the market also needs finance, marketing and commercial risk-taking.
  3. Research and development and patents encourage firms to invest in new ideas.
Note
  • A patent grants a temporary legal monopoly over an invention, protecting the reward from imitators.
  • That protection gives firms a reason to fund the risky research behind innovation.

Why Firms Innovate

  1. The prospect of competitive advantage and market power drives innovation.
  2. Product innovation creates new or improved goods.
  3. Process innovation finds cheaper ways to produce.
Example
  • James Dyson's idea of a bagless cyclonic vacuum cleaner was the invention; turning it into a product sold in shops was the innovation.
  • A pharmaceutical firm patents a new drug, protecting its reward from imitators long enough to recover its research costs.
  • Fitting robots to a car assembly line is a process innovation: it raises productivity and cuts the cost per car.
  1. Technological change raises productivity and lowers unit costs, shifting a firm's average and marginal cost curves downward.
  2. Some market structures innovate more, as large profits can fund research.
  3. State funding can also support risky, early-stage ideas.

Keep the Two Terms Apart

Exam technique
  • Define invention and innovation separately and precisely.
  • Link innovation to dynamic efficiency and lower long-run costs.
Common Mistake
  • Do not use invention and innovation interchangeably.
  • Invention creates the idea, while innovation brings it to market.
Self review
  • Define invention.
  • Define innovation.
  • What do patents encourage?
  • Distinguish product from process innovation.
  • How does technological change affect a firm's productivity and cost curves?

1.4.8b Technological change and market structure (A-level only)

How Technological Change Reshapes Markets

Definition

Creative destruction: the process, described by Schumpeter, by which new products and technologies replace and destroy existing ones, reshaping the structure of markets.

  1. Technological change alters production methods, productivity and costs.
  2. It can create new products and markets while destroying old ones.
  3. So it can reshape the very structure of a market.
Note
  • Technology can lower barriers to entry or hand one firm a decisive edge.
  • Market structure is not fixed: technology can reshape it over time.

How Technology Shifts Market Structure

  1. New technology can cut costs and raise productivity.
  2. It can lower entry barriers, opening a market to new firms.
  3. Or it can give one firm a decisive cost or product advantage.
Example
  • Streaming services such as Netflix created a new market and destroyed the DVD-rental market that firms like Blockbuster relied on, a clear case of creative destruction.
  • Online marketplaces let small producers reach national customers once served only by large retailers, fragmenting some markets and easing entry.
  • Yet network effects, where a product becomes more useful the more people use it, so users flock to the biggest platform, can hand a single firm a decisive lead and concentrate a market around one dominant player.

More or Less Concentration?

  1. Sometimes technology fragments a market by easing entry.
  2. Sometimes it concentrates one by rewarding a single leader.
  3. So its effect on concentration can go either way, which is why judgement depends on the specific market.

Treat Structure as Dynamic

Exam technique
  • Show how technology can lower barriers or hand one firm an advantage.
  • Argue both ways on whether it raises or lowers concentration.
Common Mistake
  • Do not treat market structure as fixed.
  • Technology can reshape it over time, for better or worse.
Self review
  • How does technological change affect costs?
  • How can it lower barriers to entry and develop new markets?
  • How can it raise concentration?
  • Why is market structure not fixed?
  • Give one real example of technology creating a new market and destroying an existing one.
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1.4.8 Technological change (A-level only) Revision Guide

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