2.1.3 (R&D) and innovation Flashcards
What is innovation and why do firms innovate?
Innovation is the process of coming up with an idea and developing this into a process or product. Innovation allows firms to gain the competitive advantage by securing patents on the innovated products and have a cash cow in terms of revenue
What benefits arise specifically from innovating a production process?
If innovation occurs within a production process through the use of research and development such as use of technology, it can lead to increased efficiencies such as allocative and productive efficiency. Productivity increases so reduced costs and profit margins rise.
What may be a -ve of innovation?
Can be a huge loss for the firm if the innovation process or of the product fails and actually can lead to other firms innovting which may make them more succesful reducing competivity.
How can innovation incentivise increased market power/share?
Innovation processes through research and development will usually have high start up costs due to the high sums of cash required to buy capital and high qulaity machinery. Thus these high start up costs for firms to even compete in these markets will act as a barrier to enter allowing for higher market share. Also the bigger firms with greater cash flows can benefit from the technical economies of scale reducing their avergae costs in the long run
Explain the product life cycle
Will be introduced into the market but only after the research and development stage where the product/production process is innovated. After introduction, growth stage occurs where firms may possibly increase prices. The product then matures and then declines. Firms can rationally decide whether to create extension strategies before the decline stage or start the production of a new good and innovate a new product. The revenue gained from the product which had declined may be used for the innovation of the new product.
