Please click Orange links for more information August 24, 2007 Friday Dr. Denslow began by talking about the syllabus. Exams are available at two times on the scheduled exam days: 8:30am in Bryan Hall 130 or at 8:20pm in testing rooms that will be announced at a later time. The final exam will be Wednesday December 5, 2007 at 8:30 am in testing rooms that will be announced at a later time. There will be one make up test on Monday, December 3, 2007. This is an opportunity to make a higher score on any previous test. There is a course packet available for this course at University Copy and More. It is $15 and will be available after Monday August 27, 2007. It includes a printed copy of the syllabus and print outs of online readings. (Note: All information in the course pack is available on the course website) Office hours will be held on Mondays and Wednesdays in Matherly 217. Denslow stated that he will try to be there for a few hours after class on each of these days. Agent acts on behalf of principal. Ex. A doctor is an agent and the patient is a principal. You go to a doctor and tell them what is wrong so they can help you. Dr. Denslow began class by explaining the features of expansion through this model:
Tools that will be used for the exams are: We will begin by discussing Innovation:
August 27, 2007 Monday Dr. Denslow continued with Innovation. He explained that even though there was a recession in 2001, the productivity growth of the economy still increased because of Innovation. We had a new economy at this point in time.
Q*= Y*- N* * = rate of growth Doubling Rule Goods Social Opportunity Cost of One More User Definitions: Excludable good: Easy to charge for this type of good. Non excludable good: Impossible to charge for this type of good. Note: Innovation is a public good but is partially excludable. Exogenous Innovation- Innovation purely to gain knowledge. This type of innovation has no motivation to make profit behind it. Endogenous Innovation- Innovation that is sought after in order to make a profit.
August 29, 2007 Wednesday Q*= Y*- N* * = rate of growth (Generalization: Z= XY => Z*=X*+ Y*) An overestimation of Y* implies an overestimation of Q* Paradox of Scale: Law of Demand: This law states that when there is an increase in price, it causes a Demand curves have negative slopes
Example:
For the Market Demand:
Aside: An example of a product that goes against the Law of Demand is the demand for Aglets, the plastic tips that go on shoelaces.
Demand for Aglets doesn’t work for the Demand Slope Law, as it However, at some point there will be a negative slope. Two Reasons/Causes for the Law of Demand: 1. Substitution Effect: As the price increases, society will substitute the product for something else. This is the most important effect. 2. Income Effect: As the price increases, it causes society to become poorer since There are two types of goods: 1. Normal Goods. An increase in Income would cause an increase in Demand for a normal good. (Examples include new cars, dining at nice restaurants, etc) 2. Inferior goods. An increase in Income would cause a decrease in Demand for inferior goods. (Examples include city bus service, used cars, fast food, etc)
August 31, 2007 Friday Dr. Denslow started with an example: Suppose you are a scientist and come up with a new stem cell application, called Audacity, to cure loss of hearing. How do you set the price?
The MC is $200. The profit maximizing price is $600. Consumer surplus (CS) = (1000-600) x 800 x ½ = $160,000 Dead Weigh Loss (DWL) = (600-200) x (1600-800) x ½ = $160,000 If the price was lower, DWL was decrease, CS would increase but profit would not be maximized. Therefore, there would be less incentive to invent a product such as Audacity, because the maximum amount of profit is significantly lower.
Now say the economy is three times larger, this would mean the price would triple and the profit would also triple.
This is endogenous innovation. As the economy gets larger, the scale of economy grows. This should mean an increase in the number innovations and an increase in the rate of growth of labor productivity. Innovation is a public, non-rival good. The paradox of scale would be that even though innovation is endogenous and even though the economy is much larger and innovation is non rival, if you compare the past ten years the rate of growth of productivity is about the same. Explanations of the paradox of scale:
The first Research and Development dollars will be spent on easiest ways to improve fuel efficiency. This graph shows that as R&D Spending increases, the amount of liters of gas saved becomes less and less. It is more rational to come up with the easy ideas first.
September 5, 2007 Wednesday Dr. Denslow continues with Innovation. Recap on Paradox of Scale: Example of a recipe: Think of a laser. It is thought that this idea was presented around the 1950’s. This is the endogenous example. It was actually thought up around 1917 for exogenous innovation. The person behind it, Albert Einstein was purely seeking to gain knowledge. It also builds on the notion that innovation is partially excludable (copyrights, charge other people to use it), and that innovation is endogenous which means we try to explain it through economic standards. Innovation is very important. Think of innovation for health purposes. When the baby boomers are older, research and new medicines for illnesses such as Alzheimer’s and Diabetes and many others will be a lot more important because they will be affecting a lot of people. Paradox of Scale One idea creates opportunities for many more. 2. Increasing Variety of Products Simple economy richer economy
The simpler economy has a 50% growth in GDP. The richer economy has only a 1% growth in GDP. This is because there are a lot more products available in this economy which means it takes a lot more innovation to increase the overall GDP.
The economy above has few products but a lot more innovation. They also experience a 50% growth in GDP even though they have few products. Innovation can be: 1. Diffuse or General Purpose Technology (GPT). This includes a wide varity of products or concepts such as steam power and electricity. 2. Specific-An example of specific would be a certain color of ink for a Hewitt Packard printer or a bread-maker. 3. Contestable ideas Fact: The number of patent related law suits has increased recently because of this idea. September 7, 2007 Friday
We will be picking up on Innovation. (Denslow noted that we aren’t covering the topics that he had intended to by Exam One. He wants to go slowly though and he will adjust the class speed later. He will be announcing later next week which readings and topics will be on test one.) Continuing with contestable ideas: When economy is doubled in size you have a new profit of profit 1 + profit 2. As the profit gets larger, so does the incentive to fight over who has the property rights to it.
Hindrances to patent system: Patent trolls – People that make up things and patent them so that when someone finally invents it, they own the rights to it and can then make money. Intellectual ventures- These people buy patents from failing corporations, small inventors, universities, etc. They own from 3000 to 5000 patents and have no intention of ever producing anything. Their purpose is to look for people doing these things and sue them. They are creating a “patent market”. Suppose there is an industry producing shoes, but you patent the notion of aglets (the plastic tips on shoe laces). If they produce shoes that have laces with aglets they have to pay you 10 cents every time they use aglets.
The 10 cents is added to the MC of the shoes. This raises the price and creates a DWL for society and decreases the consumer surplus. Society is worse of due to the patent If someone were to sue saying that patent was invalid, they would win because this patent is not novel. It is an obvious innovation. It isn’t worth it to the shoe producers or individual consumer but it is beneficial to society. The above issue leads to the free rider problem. A way to get around it: Have a second level of patent review so that patents that don’t exactly fit the criteria are rejected. More explanations of paradox of scale: 4. Process vs. Product Innovation- An idea confirmed and tested by Doug Waldo (economics professor at UF). He says their has been an increase in the share of innovations that are product innovations Process Innovation- Takes an existing product and produces it more efficiently. Product Innovation - Creating an entirely new product. Example: Sodas (amount available)
For the above table, the contribution to GDP is unchanged because National income accounts don’t recognize the fact that there is more of a variety of types of soda available (even though society is better off because of the variety). The product innovation isn’t counted which means we underestimate the rate of growth of real GDP and therefore underestimate that society is better off 5. Burden of Knowledge- related to the notion that innovation is combinatorial. It takes longer to get enough knowledge to come up with new ideas. You have to master previous ideas before you can create new ones from it. Issues concerning paradox of scale: Denslow closed saying that he will begin Elasticity on Monday. September 10, 2007 Monday The readings will go through innovation and productivity growth. The test will cover topics covered in lecture. We are behind but he is not worried about it. Below is a table from the economic report of president from 2007. The rate of growth of productivity picked up around 1996, nearly doubling. This is a “big deal” to economists.
The growth is associated with the general purpose technology. It was though that productivity growth would slow down because of a recession in 2000 but it didn’t. The chart is trying to figure out what the reason for this was. Possible explanations: Capital (K) deepening- increase in the amount of capital per worker hour (N). (Using trucks instead of bikes; having assembly lines instead of manual labor). The table shows that productivity growth accelerates. The acceleration was not caused by a rapid increase of skill/work force or from capital deepening. The major reason for the increase is because of the unknown, called total factor productivity (TFP). It’s not really known what goes into it but it is the major cause. How do we explain what is going on? Economists look for similar occurrences in the past to understand what is happening today. Intangible capital- This is part of the unknown. It includes research and development, advertisement, and the reorganization of operations (taking advantage of new technology). The point of the graph is to try to understand what will happen in the future. Another reading addresses why we have higher productivity growth and other countries are slower. Europeans are slower. What is the cause? More information is found in the readings. Elasticity of Demand (along a demand curve): % ∆ Quantity Demanded It is a pure number. It is free of units. Examples: Good A Extremes of Elasticity: If Elasticity >1 it’s called elastic. If Elasticity is approaching, or equal to, infinity, it’s called perfectly elastic. If Elasticity =1, it’s called unitarily elastic.
Principles of Entrepreneurship |