Economics Take-home Final Exam Question Response – Admission/Application Essay Example
Task FINAL EXAM QUESTION RESPONSE Question There is positive relationship of innovation and monopoly power with concomitant abnormal profits. These hypotheses can be proved by use of various ways in which monopoly power takes place in the market place using economic analysis.
Innovation is actually the invention of new ideas and knowledge that are usually meant to satisfy a particular need and will be paid by the consumers. Those who carry out the inventions are usually considered to be unique in the society and will benefit from them as they almost have no competition or kicks out an older means rendering them effective. Such is the case in companies and will lead to monopoly in two ways (Stackelberg, Heinrich , Damien, Lynn and Rowland,2011)
First, the company which innovate a particular idea usually keeps the information to themselves and acquires protection by use of government or per tent rights in the use of the service. This makes other firms not provide the product leaving the inventor to be the sole provider in the market. This creates natural monopoly in different industries resulting to abnormal profits.
Second, by innovating means the owner will have to sell more of particular units in the market because even if a competition was to come in, it will take time. This simply implies innovation cannot happen in a single day, the existing firms will take time since they have to conduct research and development before they can rival the inventor. This makes the firm to produce more leading to more profits (Stackelberg, Heinrich, Damien, Lynn and Rowland, 2011). The firm however, invests again the excess profits on how to control the market leading to monopolies over time. Thus Schumpeter hypothesis of positive relationship of innovation and monopoly is true and should be accepted.
Large firms are more innovative than small firms?
In an industry, there is always large firms and small firms. Large firms are those usually considered to be firms with high number of workers, has invested more in modern technology and are relatively stable in economic fluctuations. Small firms however, do have small number of employees and are easily affected by economic crisis such as inflation.
Large firms do have high profits margin. Thus they can hire more qualified workers and invest extensively in modern technologies to produce at ease. There excess income can also be invested in research and development that makes them to be more innovative in the market. This makes them to have more comparative advantage than the small firms in innovation.
However, in major markets and industries, small firms should be more creative than the large firms. This is because they are competing with already established firms in the market hence will tend to spend more on research and development to narrow the gap between them or if they have to acquire a substantial share in the market. Again large firms will merely innovate to keep the market trends but the rate at which they will innovate is less proportionate to the small firms who must find their ways into the market.
Thus, the hypothesis of large firms being more innovative than small firms is debatable and would not apply to major industries in the economy.
Characteristics of the firm are key to a particular industry and the investment in innovation. Where the firms are operating in competitive market, they cannot influence market prices since the demand and supply are usually determined by the market conditions. Demand is usually sensitive to prices and companies would compete in output rather than prices. The firms thus would be internally innovative on how to reduce their costs of productions so that they can produce more units into the market if they are to make profits. They will also have to find ways on how to produce more quality goods than the rival firms if they are to have more demand of their products (Stackelberg, Heinrich , Damien, Lynn and Rowland,2011) However, this cannot be said to those firms operating in monopoly market since they dictate market prices and quantity. They do not have to worry much about innovations since they are assured of the market.
Nevertheless, all firms will always take advantages of new technology that could help them in their production activities. New inventions will always be more efficient, speeds work and reduces the cost of operations. This makes them to produce more leading to high sales that maximizes profits (Norman, George, Jacques, and Louis, 2000). They see this as the only way to provide a competitive production measure and they must adopt them. Those industries or a company who does not stand a chance t be less competitive in the market.
Norman, George, Jacques F. Thisse, and Louis Phlips. Market Structure and Competition Policy: Game-theoretic Approaches. Cambridge [etc.: Cambridge University Press, 2000. Internet resource.
Stackelberg, Heinrich , Damien Bazin, Lynn Urch, and Rowland Hill. Market Structure and Equilibrium. Berlin: Springer, 2011. Internet resource.