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Summary HPI4001 Case 2
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Lecture Case 2 Economic Theories and Innovations EH1. What is innovation according to economists? (part 1 )
Innovation is defined as: successful exploitation of new ideas (Swann, 2009)
So it has to have an commercial aspect and the idea has to be completely new
Simple model of innovation:
1. Research and creativity (looking at a bird, why cannot people fly?)
2. Invention (wings on people)
3. Design and development (look like an airplane)
4. Innovation (end-result of sequence of steps, in this case modern airplane)
Difference between invention and innovation:
Invention: generation of new ideas through research or other form of creativity
Innovation: the commercial application of an invention (Swann, 2009)
Types of innovation:
Product innovation (new medicine)
Process innovation (new way of distributing this medicine to the patient within the hospital)
Organizational innovations (outsource pharmaceutical branche from hospital)
Economics: science studying scarcity (=tension between unlimited needs and limited possibilities to
fulfil these needs) -> so you cannot have everything you want basically
When you choose to spend your money on clothes for example, you allocate your money
(scarce resource) to this purpose in economic terms.
Opportunity costs: the costs for the other alternative option that you did not choose
Scarcity has to do with choices. So you want to choose the best option with the least opportunity
cost and the one you prefer the most.
All in all, Economics studies the efficient allocation of scarce resources (time, money, lectures e.g.).
Many of these resources are also present in healthcare so it is important to take a look at them.
Adam Smith (Wealth of Nations 1776): first person who talked about scarcity. He wrote a book
about this about scarce resources and about how we can reduce the tension -> How can we achieve
macro-economic welfare/economic growth in our nation?
Neoclassical economic framework (1776-1920): following ideas of Adam Smith which incorporates
all kind of behavioural models
Consumer and scarcity
Producer and scarcity
Market and scarcity (invisible hand -> try to balance the needs of producers and consumers)
1
, 2. Why is innovation important from an economic point of view?
(part 1)
Economic point of view includes:
1. Efficient allocation of scarce resources
2. Possibilities to reduce the tension between unlimited needs and possibilities by creating
economic welfare/economic growth
Why is innovation important from an economic point of view?
Widespread implications for economy and society
-Innovation can be costly (e.g. many scarce resources, high opportunity costs)
-Innovation may lead to economic benefits (invented medications e.g.)
-Innovation: considerable impact on economic growth (invention of airplane e.g.)
A real understanding requires deviation from mainstream economics.
Theoretical challenge from innovation point of view. Therefore neoclassical economic framework
looks only at this moment when a innovation doesn’t always happen at this moment. Perfect
information is assumed by neoclassical model. So you need another model for innovations.
3. How do economists look at innovation? Which economic
theories on innovations are there (part 2-4)
Theory definition:
In everyday life: theory is an idea (neighbour is kissing a woman who is not his wife, idea is
that he is cheating)
In science: bundle of concepts (or variables or factors). Assumptions on the presumed
relationships between these concepts (producer theory: profit, revenues and costs as
concepts. It is about the relationship between them)
We will use the science definition for this course
Process Theory:
1. Observations that evoke questions
2. Using logic, previous research to formulate a hypothesis
3. Perform an experiment or test
4. Publish findings in impact journals
5. Duplication and verification by other scientists
6. If experiments continue to support hypothesis, it may become a theory
This way of working has led to a neo-classical theory of consumer bahaviour.
Consumption of consumer depends on the following concepts:
-Preferences
-Income
-Prices
Consumption of normal goods is high when:
-Preferences are high
-Income is high
-Prices are low
2
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