Jagannath University, Dhaka

Assignment
on

Pure ComPetition in the Long run

Course Name: Microeconomics

Course Code: 1204

Submitted on 26th May 2024

Submitted to:
Dr. Imranul Hoque
Professor
Department of Marketing
Jagannath University, Dhaka

Submitted by:
Team: Vision Venturs
Department of Marketing (17th Batch)
Jagannath University, Dhaka
 Name & ID of the group members
(Group Name: Vision Ventures)
SIRIAL NO. NAME ID

1. MD. TANIM (GL) B220204009

2. MOST. SAMSUN NAHAR RIA B220204018
3. MD. SHAKIL TALUKDER B220204046
4. KAZI FARID B220204063
5. SABBIR AHMED B220204072
6. MASUDUR RAHMAN BIPLOB B220204075
7. FAISAL MAHMUD SIFAT B220204081
8. PRANTA CHANDRA DAS B220204085
9. MD JAKIRUL ISLAM B220204094
10. NIRAB KUMAR SAHA B220204061
 Table of Contents
NO. Contents

1. The Long Run in Pure Competition.

 Definition of long run and short run
 Difference between long run and short run in pure competition
 Profit maximization in the long run
 Perfect competition

2. The Long-Run Adjustment Process in Pure Competition

 Long-Run Equilibrium in Perfect Competition
 Long-Run Competitive Equilibrium Price
 The Long-Run Competitive Equilibrium Equation
 Conditions of Long-Run Competitive Equilibrium
 Monopolistic Competition Long-Run Equilibrium
 Long Run Competitive Equilibrium - Key takeaways

3. Long-Run Supply Curves

 3 Main Types of Industries in the Long-Run Supply
 Long-Run Supply for a Constant- Cost Industry
 Long-Run Supply for an Increasing- Cost Industry
 Long-Run Supply for a Decreasing- Cost Industry

4. Pure Competition and Efficiency

 production efficiency and allocative efficiency
 Maximum consumer and producer surplus
 Dynamic adjustment
 Invisible hand
 A patent failure

5. Technological Advance and Competition

 How New Technology Affects Market Equilibrium in Perfect Competition
 Creative Destruction
 The profit incentives for innovation
 LO11.1 The Long Run in Pure Competition.

Definition of long run and short run:

In the study of economics, the long run and the short run don't refer to a specific period of time, such
as five years versus three months. Rather, they are conceptual time periods, the primary difference
being the flexibility and options decision-makers have in a given scenario. In the second edition of
"Essential Foundations of Economics," American economists Michael Parkin and Robin Bade give an
excellent explanation of the distinction between the two within the branch of microeconomics:

"The short run is a period of time in which the quantity of at least one input is fixed and the quantities
of the other inputs can be varied. The long run is a period of time in which the quantities of all inputs
can be varied.

"There is no fixed time that can be marked on the

calendar to separate the short run from the long
run. The short run and long run distinction varies
from one industry to another."

In short, the long run and the short run in

microeconomics are entirely dependent on the
number of variable and/or fixed inputs that
affect the production output.

Difference between long run and short run in pure competition:

 In the long run:

 The entry and exit of firms in our market models can only take place in the long run.
 industry have sufficient time to either expand or contract their capacities.
 the number of firms in the industry may either increase or decrease as new firms
enter or existing firms leave.
 The length of time constituting the long run varies substantially by industry.
 In the short run:
 the industry is composed of a specific number of firms.
 each with a plant size that is fixed and unalterable.
 Firms may shut down in the sense that they can produce zero units of output.
 they do not have sufficient time to liquidate their assets and go out of business.

Profit maximization in the long run:

In the long run, firms aim to maximize their profits
by determining the optimal level of output and
adjusting their production factors. Understanding
how firms in different market structures make
profit-maximizing decisions in the long run is crucial
in managerial economics. In this blog, we will
explore the concept of profit maximization in the
long run and discuss its implications for firms
operating in various market structures.

Perfect competition:

In perfect competition, firms in the long run achieve a state of equilibrium where they produce at the
output level that maximizes their profits. Here’s how it works:

 Entry and exit only

 Identical costs
 Constant-cost industry

Entry and exit only:

In the long run, firms can freely enter or exit the market. If firms are making economic profits, new
firms will be attracted to enter the market, increasing the supply. Conversely, if firms are incurring
losses, some firms will exit the market, reducing the supply.

Identical costs:

All firms in the industry have identical cost curves. This assumption lets us discuss an “average,” or
“representative,” firm, knowing that all other firms in the industry are similarly affected by any long-
run adjustments that occur.

Constant-cost industry:

The industry is a constant-cost industry. This means that the entry and exit of firms does not affect
resource prices or, consequently, the locations of the average-total-cost curves of individual firms.

LO11.2 The Long-Run Adjustment Process in Pure

Competition
Long-Run Equilibrium in Perfect Competition:

Long-run equilibrium in perfect competition is the outcome in which the firms settle after
the supernormal profits were competed away. The only profits that firms do make in the long run
are normal profits. Normal profits occur when the firms are just covering their costs to remain in the
market.

Let's go through some diagrammatic analysis to visualize it!

Figure 1 below shows how the entry of new firms in a perfectly competitive market in the short run
eventually establishes the long-run competitive equilibrium.

FIGURE:1

Figure 1 above shows the entry of new firms and the establishment of the long-run competitive
equilibrium. The graph on the left-hand side shows the individual firm view, whereas the graph on the
right-hand side shows the market view.

Initially, the price in the market in the short run is PSR, and the total quantity sold on the market is
QSR. Firm A sees that at this price, it can enter the market as it evaluates that it can make
supernormal profits, shown by the rectangle highlighted in green in the graph on the left-hand side.

Several other firms, similar to Firm A, decide to enter the market. This results in the market supply
increasing from SSR to S'. The new market price and quantity are correspondingly P' and Q'. At this
price, some firms find that they cannot remain in the market as they are making losses. The loss area
is represented by the red rectangle in the graph on the left-hand side.

The exit of firms from the market shifts the market supply from S' to SLR. The established market
price is now PLR, and the total quantity sold on the market is QLR. At this new price, all individual
firms earn only normal profits. There is no incentive for firms to enter or leave the market anymore,
and this establishes the long-run competitive equilibrium.
Long-Run Competitive Equilibrium Price:

What is the price that the firms charge in the long-run competitive equilibrium? When the long-run
competitive equilibrium is established in a perfectly competitive market, there is no incentive for any
new firms to enter the market or any existing firms to exit the market. Let's take a look at Figure 2
below.

FIGURE:2

Figure 2 above shows the long-run competitive equilibrium price. In panel (b) on the right-hand side,
the market price is located where the market supply intersects the market demand. As all firms are
price takers, each individual firm is able to charge only this market price - not above nor below it. The
long-run competitive equilibrium price is located at the intersection of the marginal revenue (MR) and
average total cost (ATC) for an individual firm, as shown in panel (a) on the left-hand side of the
graph.

The Long-Run Competitive Equilibrium Equation:

What's the long-run competitive equilibrium equation? Let's find out together!

As the firms in long-run competitive equilibrium in perfect competition only make normal profits,
then they are operating at the intersection of the marginal revenue (MR) and average total
cost (ATC) curves. Let's take a look at Figure 3 below to evaluate further!
S can be seen from Figure 3 above, a firm in a perfectly competitive market that is in long-run
equilibrium operates at PM, which is the price as dictated by the market. At this price, a firm can sell
any quantity it wants to sell, but it cannot deviate from this price. Therefore the demand curve Di is a
horizontal line that passes through the market price PM. Each additional unit sold yields the same
amount of revenue, and therefore marginal revenue (MR) is equal to average revenue (AR) at this
price level. Thus, the equation for the long-run competitive equilibrium in a perfectly competitive
market is as follows:

MR=Di=AR=PM

Conditions of Long-Run Competitive Equilibrium:

What conditions should hold for the long-run competitive equilibrium to persist? The answer is the
same conditions that hold for a perfectly competitive market. These are as follows.

 Conditions of long-run competitive equilibrium:

o A large number of buyers and sellers - there are infinitely many on both sides of the market
o Identical products - firms produce homogeneous or undifferentiated products
o No market power - firms and consumers are "price takers," so they have no impact on the
market price
o No barriers to entry or exit - there are no setup costs for sellers entering the market and no
disposal costs upon exit
In addition, the equation for the long-run competitive equilibrium in a perfectly competitive market
should hold.

MR=Di=AR=PM
Monopolistic Competition Long-Run Equilibrium:

Monopolistic competition long-run equilibrium occurs when such equilibrium is characterized by firms
making normal profits. At the equilibrium point, no firm in the industry wants to leave, and no
potential firm wants to enter the market. Let's take a look at Figure 4 below.

Figure 4 above shows a long-run equilibrium in a monopolistically competitive market. A firm would
operate by the profit-maximizing rule where (MC=MR), which is shown by point 1 on the diagram. It
reads off its price from the demand curve represented by point 2 in the graph above. The price that
the firm charges in this scenario is P and the quantity it sells is Q. Note that the price is equivalent to
the average total cost (ATC) of the firm. This indicates that only normal profits are being made. This is
the long-run equilibrium, as there is no incentive for new firms to enter the market, as no
supernormal profits are being made. Note the difference with the long-run competitive equilibrium in
perfect competition: the demand curve is downward-sloping as the products sold are slightly
differentiated.

Long Run Competitive Equilibrium - Key takeaways:

 Long-run competitive equilibrium is a market outcome in which firms earn only normal profits
over a longer time horizon.
 Normal profits are when the firms make zero profits to just remain operational in a given
market.
 Supernormal profits are profits over and above normal profits.
 The equation for the long-run competitive equilibrium in a perfectly competitive market is as
follows:
MR=Di=AR=PM

 Conditions for long-run competitive equilibrium are the same as conditions for a perfectly
competitive market.

LO11.3Long-Run Supply Curves

3 Main Types of Industries in the Long-Run Supply:
Three main types of industries found in the long-run supply. The Industries are:
1. Constant-Cost Industry,
2. Increasing-Cost Industry,
3. Decreasing-Cost Industry.
1.Long-Run Supply for a Constant- Cost Industry:

Fig. 8.13(a) and 8.13(b) show the derivation of the long-run supply curve for a constant-
cost industry.

Assume that the industry is initially in long-run equilibrium at the intersection of market demand
curve D1 and supply curve S1, in part (b) of the figure.

Point A is on the long- run supply curve SL because it tells us that the industry will produce Q1 units
of output when the long-run equilibrium price is P1.
Suppose the market demand for the product increases unexpectedly. A typical firm is initially
producing an output q1, where P1 = LMC = LAC. But the firm is also in short-run
equilibrium, so that P1 = SMC. Suppose the market demand curve shifts from D1 to
D2 which cuts the supply curve S1 at C. As a consequence, the price increases from P1 to P2.
8.13(a) shows how the price increase affects a firm in the industry. When the price increases
from P1 to P2 the firm follows its SMC curve and increases its output to q2 which maximises
profit because it satisfies the condition that P = SMC.

If every firm responds this way, each firm will be earning a positive profit in the short-run equilibrium.
This profit will be attractive to investors and will cause existing firms to expand their output and new
firms to enter the market.

S2 as in Fig. 8.13(b). This

As a result, the short-run supply curve shifts to the right from S1 to
shift causes the market to move to a new long-run equilibrium at the intersection of D 2 and S2 at
B. Output must have expanded enough so that firms are earning zero profit and the incentive to
enter and leave the industry disappears.

The long-run supply curve in a constant-cost industry is a horizontal line SL as in part (b), at a
price which is equal to the long-run minimum AC of production.

2. Long-Run Supply for an Increasing- Cost Industry:

8.14(b), the long-run supply curve in an increasing-cost industry is an upward- sloping curve
SL. When demand increases, initially causing a price rise, P2, the firms increase their output from
q1 to q2 in Fig. 8.14(a). Then, new
firms enter into the industry causing a shift
of the supply curve to the right.

Since input prices increase as a result, the

new long-run equilibrium occurs at a higher
price than the initial equilibrium. In an
increasing-cost industry, the long-run
industry supply curve is upward-sloping. The
industry produces more output, but only at a higher price needed to compensate for the increase in
input costs.

3.Long-Run Supply for a Decreasing- Cost Industry:

The industry supply curve can also be downward-sloping. In this case, the unexpected increase in
demand causes industry output to expand as before. If industry becomes larger, it can take advantage
of its scale of operation to obtain some of its input cheaply. For example, a large industry may allow
for an improved transportation system or for a better, less expensive financial network.

In such a situation the firm’s AC curves shift downward, and the market price of the product falls. The
lower price and the lower AC of production induce a new long-run equilibrium with more firms, a
lower price and more output. Thus, in a decreasing-cost industry, the long-run supply curve is
downward-sloping.

The long-run, downward-sloping supply curve also arises when expansion itself lowers input prices or
when firms can use scale economies to produce at lower cost.

LO11.4 Pure Competition and Efficiency

production efficiency and allocative efficiency:

The long run equality of price (P) and minimum average total cost(ATC) means the competitive firm
will use the most efficient known technology and charge the lowest price consistent with their
production cost. That way, the competitive firm will allocate production efficiency.

the long run equality of price (P) and marginal cost(MC)implies that resources will be allocated in
accordance with consumer taste so that product meet consumer demand and that way occurs
allocative efficiency.

Produc on efficiency : MC=ATC

Production efficiency means producing the largest number of products and services based on
resources available.

In long run equilibrium for perfect competitive market, production efficiency occurs on the basis of
"Average total cost curve" i. e {where marginal cost(MC)=Minimum average total cost(ATC)}.

Example for an production efficiency; suppose, each firm in the Meghna industry is producing
100units products by using 5000 tk. worth resources. If any firm produced that same amount of
output at any higher total cost say 7000 tk. It would be wasting resources tk. 2000 worth of
alternative product. So requiring it to either reduced or go out of business.

Figure: A

The equality of price (P), marginal cost (MC) and minimum average cost (ATC) at output Q,1 indicates
that the firm achieving production efficiency.

Alloca ve efficiency: P=MC

Allocative efficiency is an efficient market Where by all goods and services meet the needs and wants
of society.

Allocative efficiency ensure that the resources are used so that their [Marginal benefit to society is
equal to their Marginal cost( P=MC)].
For Example, if a majority of customer buy white coloured car the manufacturer will allocate their
more resources to produce white coloured car because they ate high demanded.

Figure: A

The equality of price (P), marginal cost (MC)and minimum average total cost(ATC)at output Q,1
indicate allocative efficiency.

Maximum consumer and producer surplus:

Consumer surplus:
Consumer surplus is the difference between what consumer are willing to pay and what they actually
pay for a products.

Here, consumer surplus is =(expec ng and willing value- actual payment price)

=300 -100

=200

Figure: B

In the purely competitive market allocative efficiency occurs at the markets equilibrium output Q. c
the sum of consumer surplus is the( green area).

Producer surplus:
Producer surplus is the difference between the actual price of a product and how much producer are
willing to sell the product for.

For Example, If a producer is willing to sell a product at tk. 100,assuming its production cost is the
same and, if the consumer ready to pay tk. 150 for it, the difference of tk.

50 is the producer surplus.

Figure: B

In the purely competitive market allocative efficiency occurs at the markets equilibrium output Q, c
the sum of producer surplus is the (blue area).

Dynamic adjustment:
Dynamic Adjustment refers to the way in which the system transitions to a new steady state when
there are changes in determining variables. A further attribute of purely competitive markets is their
ability to restore the efficiency just described when disrupted by changes in the economy. A change in
consumer tastes, resource supplies, or technology will automatically set in motion the appropriate
realignments of resources. For example, suppose that cucumbers and pickles become dramatically
more popular. First, the demand for cucumbers will increase in the market, increasing the price of
cucumber . So, at current output, the price of cucumbers will exceed their marginal cost. At this point
efficiency will be lost, but the higher price will create economic profits in the cucumber industry and
stimulate its expansion. The profitability of cucumbers will permit the industry to bid resources away
from now-less-pressing uses, say, watermelons. Expansion of the industry will end only when the
supply of cucumber has expanded such that the price of cucumbers and their marginal cost are
equal—that is, when allocative efficiency has been restored. Similarly, a change in the supply of a
particular resource—for example, the field labourers who pick cucumbers—or in a production
technique will upset an existing price –marginal-cost equality by either raising or lowering marginal
cost. The resulting inequality of MC and Pwill cause producers, in either pursuing profit or avoiding
loss, to reallocate resources until product supply is such that price once again equals marginal cost. In
so doing, they will correct any inefficiency in the allocation of resources.

Invisible hand:
The invisible hand is a metaphor for the unseen forces that move the free market economy. Through
individual self-interest and freedom of production and consumption, the best interests of society, as a
whole, are fulfilled. The constant interplay of individual pressures on market supply and demand
causes the natural movement of prices and the flow of trade.
The term "invisible hand" first appeared in Adam Smith's famous work "The Wealth of Nations" to
describe how free markets can motivate individuals, acting in their own self-interest, to produce what
is societally necessary.

KEY TAKEAWAYS:
 The invisible hand is a metaphor for how, in a free market economy, self-interested
individuals operate through a system of mutual interdependence.
 This interdependence motivates producers to make what is socially necessary, even though
they may care only about their own well-being.
  Adam Smith introduced the concept in his 1759 book "The Theory of Moral Sentiments" and
later in his 1776 book "An Inquiry into the Nature and Causes of the Wealth of Nations."
 Each free exchange signals which goods and services are valuable and how difficult they are to
bring to market.
 Critics argue that the invisible hand does not always produce socially beneficial outcomes, and
can encourage greed, negative externalities, inequalities, and other harms.

How the Invisible Hand Works :

The invisible hand metaphor distills two critical ideas. First, voluntary trades in a free market produce
unintentional and widespread benefits. Second, these benefits are greater than those of a
regulated, planned economy. Each free exchange signals which goods and services are valuable and
how difficult they are to bring to market. These signals, captured in the price system, spontaneously
direct competing consumers, producers, distributors, and intermediaries—each pursuing their
plans—to fulfill the needs and desires of others. The invisible hand is part of the laissez-faire policy
concerning the market. Laissez-faire translates to "let do/let go" and this approach holds that the
market will find equilibrium without government or other interventions forcing it into unnatural
patterns.

Scottish Enlightenment thinker Adam

Smith introduced the concept in several of his
writings, such as the economic interpretation in his
book "An Inquiry Into the Nature and Causes of the
Wealth of Nations" (often shortened to just "The
Wealth of Nations") published in 1776 and an earlier
work, "The Theory of Moral Sentiments," published
in 1759. The invisible hand concept was in use during
the 1990s.

The Invisible Hand and Market Economies :

Business productivity and profitability are improved when profits and losses accurately reflect what
investors and consumers want. This concept is well-demonstrated through a famous example in
Richard Cantillon’s "An Essay on Economic Theory (1755)," the book from which Smith developed his
invisible hand concept. Smith's "The Wealth of Nations" was published during the first Industrial
Revolution and the same year as the American Declaration of Independence. His invisible hand
became one of the primary justifications for an economic system of free-market capitalism.

As a result, the business climate of the U.S. developed with a general understanding that voluntary
private markets are more productive than government-run economies. Even government rules
sometimes try to incorporate the invisible hand. Former Fed Chair Ben Bernanke explained the
"market-based approach is regulation by the invisible hand" which "aims to align the incentives of
market participants with the objectives of the regulator."

Examples of the Invisible Hand:

 Consider an example of a small business facing stiff competition. To best position itself in the market,
the small business decides it will invest in higher quality materials for its manufacturing process as
well as reduce its prices.
Though the small business may be taking these steps out of self interest—in this instance, to drive
sales and capture market share—the invisible hand is at work because the market will have access to
more affordable yet higher quality goods.

Why Is the Invisible Hand Important?

The invisible hand allows the market to reach equilibrium without government or other interventions
forcing it into unnatural patterns. When supply and demand find equilibrium naturally, oversupply
and shortages are avoided. The best interest of society is achieved via self-interest and freedom of
production and consumption.
What Did Adam Smith Say About the Invisible Hand?

Adam Smith wrote about an invisible hand during the 1700s, noting that it benefits the economy and
society, thanks to self-interested individuals. The invisible hand include the automatic pricing and
distribution mechanisms in an economy that interact directly and indirectly with centralized, top-
down planning authorities.

Why Is the Invisible Hand Controversial?

Critics argue that the idea that actions of self-interested, profit-driven actors will converge on some
social optimum is clearly false. Instead, they naturally lead to negative externalities, economic and
social inequalities, greed, and exploitation. Moreover, competition driven by the invisible hand can
ultimately result in monopolies and the concentration of economic power, both of which are
undesirable for society.
Other critiques underscore that the concept relies on the assumption that producers can easily switch
from producing one type of good to any other, depending on relative profitability at a given moment.
This does not account for the sometimes enormous costs of switching and the idea that people may
engage in a business that they enjoy doing, or which has been passed down in a family, regardless of
profitability.
The Bottom Line :

The invisible hand represents the idea that specialization in production can lead self-interested
individuals to produce what is socially necessary and for the good of all. This is because increased
specialization naturally leads to a web of mutual interdependencies. For example, a shoemaker needs
others to produce their house, while a homebuilder relies on a shoemaker for shoes. On a larger scale,
market forces and competition motivate producers to make what is most profitable at the lowest
cost, encouraging technological progress and innovation, for the benefit of all.

A patent failure:

A patent is the government grant of monopoly on an invention for a limited amount of time. Patents
in United States are granted for seventeen years from the data the patent is issued or for 20 years
from the data of filing, other countries grant patents for similar time period. Patents give inventors
the sole legal right to market and sell their
new ideas for a period of 20 years. So when
considering the pluses and minuses of the
patent system, it is important to begin with
the fact that the possibility

of obtaining a patent gives inventors a

strong financial incentive to bear the
research and development (R&D) costs
necessary to come up with innovative
solutions to old problems.
At the same time, however, the patent
system also gives patent holders the ability
to stifle the creative energies of other
inventors by suing or threating to sue any
individual or firm that they believe is “infringing” on their patent by producing or utilizing their
invention without permission .The problem is most acute for products like cell phones that
incorporate thousands of different technologies into a single product. That’s because each of those
technologies might possibly infringe on one or more patents. If so, a single lawsuit filed over just one
of those patents could halt the production and sale of the entire product. The alleged infringement
may be totally unintentional or a matter of honest dispute. But if a patent holder believes that some
part of the phone is infringing on his patent, he can threaten to sue the manufacturer and demand the
shut-down of all production unless he receives royalty payments in Compensation .Consider
Microsoft, which 30 years ago was a successful innovator thanks to its Windows operating system.
Over the last 10 years, however, its Windows-based cell phones have been a failure. Yet Microsoft
CEO Steve Balmer threatened to shut down the production of all Android phones because the Android
software used to run those extremely popular phones happens to incorporate the ability to schedule a
meeting. That is a feature that most Android users don’t even know about. But it is a functionality
over which Microsoft holds a patent for mobile devices. So to avoid a lawsuit that could have shut
down the production of all Android phones, Android’s parent company, Google, is now paying
Microsoft a licensing fee on each and every Android phone. That situation is very problematic for
creative destruction be-cause the patent system is being used to help an old company that hasn’t had
a successful product in many years to effectively tax and benefit from the successful innovations of a
young rival. That ability to tax is a form of life support that allows stodgy old firms to survive longer
than they should against innovative rivals and the pressures of creative destruction. Even worse,
companies known as “patent trolls” have been created to buy up patents simply for the chance to sue
other companies and collect royalties. The patent trolls invent nothing and produce nothing. But they
are free under the current system to make billions of dollars every year by suing innovative
companies. In response, some economists have begun to argue that the net benefits of the patent
system have been overstated and that innovation might proceed faster in certain industries if patents
were abolished . Their key insight is that the net benefits of patents depend upon how easy it is for
rivals to successfully copy and market an innovative product.

LO11.5 Technological Advance and Competition

How New Technology Affects Market Equilibrium in Perfect Competition:

Inside a car factory in Puebla, Mexico. A brand new technology introduced in a

perfectly competitive market changes individual firms in the short term, and new
equilibrium is achieved in the long term.

The introduction of new technologies can change market conditions and influence competition.
Market equilibrium adjusts according to the overall effects of newly introduced technologies. The
introduction of the new technology in only a single competing firm affects the firm’s performance
compared to other companies in the market, at least in the short term. Nonetheless, other firms
eventually adjust and catch up and the market accommodates the new factors, including the new
technology.

In an ideal perfectly competitive market, there are many firms operating in the industry, such that not
one of these firms has significant influence or power to directly cause a major shift in market
conditions. Also, a perfectly competitive market involves many customers, such that not one of these
customers has significant power or influence to directly cause a major change in the conditions of the
market. Still, changes in the technological resources available to one or more firms can significantly
impact the entire market.

In a perfectly competitive market, a new technology that reduces marginal production cost would
enable and encourage firms to increase production in the short run. However, as more and more firms
adopt the technology in the long run, the competitive benefit of using the new technology would
become canceled out. Therefore, the effect of such new technology that reduces marginal production
costs would be an increase in revenues and economic benefit for the individual firm and the industry
in the short run, but a gradual reduction in relative competitive advantages in the long run, until a
new equilibrium is reached.

Impact of New Technology on a Single Firm:

Considering market demand and supply, a new technology that reduces marginal cost of production in
a single company could boost that company’s revenues and profits. Assuming that price and demand
are constant, and that all firms in the market have the same operating conditions, the new technology
that reduces marginal cost of production creates an increase in the incentive of the single firm to
produce more. For example, higher productivity based on the technology could prompt the company
to produce more with the expectation of selling more and earning more.

A high marginal production cost discourages firms from producing more because of an increase in
production would not necessarily lead to a commensurate increase in profits. However, the new
technology that reduces marginal production cost would encourage the company to produce more.
Thus, in the short term, the supply of the products of the individual firm would increase.

An increase in the supply of the products leads to a greater market presence and possibly greater
sales for the single company. In this regard, the short-run effect of the new technology would be a
potentially higher turnover of products for the individual firm. This condition equates to an increase in
the short-run business performance of the firm.

Market and Industry Adjustments to New Technology:

The new technology introduced to the industry could lead to a short-run increase in economic benefit
as the costs of production are reduced and as firms gradually adopt the new technology. These
changes correspond to a shift of the supply curve, as firms could initially increase production due to
lower costs. Business organizations’ objective in adopting the new technology would be to compete
more effectively, especially against firms already using the technology.

In the long run, the market continues to adjust and reaches a situation where all or almost all of the
firms would have adopted the technology. Assuming constant demand, the market would experience
excess in supply immediately after firms adopt the technology. This excess leads to higher losses and
associated costs for the entire industry. Firms would eventually adjust to match supply with demand.

Firms in the market would eventually operate at just about the same level of competitiveness relative
to each other, as the market reaches a new equilibrium. In this new market equilibrium, despite
constant demand, firms would experience positive net benefit because of lower production costs
based on the technology. Therefore, positive net economic benefit is achieved.

Creative Destruction:
The term creative destruction refers the dismantling of long standing practices in order to make way
for innovation and is seen as a driving force of capitalism. This term was first introduced by an
Austrian economist Joseph Suchmpeter in 1942.

He describes creative destruction as Innovations in the manufacturing process that increase

productivity, process of industrial mutation that incessantly revolutionizes the economic structure
from within, incessantly destroying the old one, incessantly creating a new one.

The theory of creative destruction stands for the long standing arrangements and assumptions must
be destroyed to free up resources and energy to be deployed for innovation.

Principles of Creative Destruction:

1. Innovation: Creative destruction involves the introduction of new ideas, products, and
technologies that replace the existing ones. Innovation is the driving force of creative
destruction.
2. Competition: The
process of creative
destruction involves
intense competition
between the old and
new technologies or
products. The new
products or
technologies must
prove to be better and
more efficient than the
old ones to replace
them. For this reason,
creative destruction is
usually heavily tied to
competition
and competitive advantages.
3. Entrepreneurship: Entrepreneurship is also a critical aspect to the process of creative
destruction. The entrepreneurs who develop new products and technologies and disrupt
existing markets are the agents of creative destruction. They are responsible for overseeing
change management, educating both internal staff and consumers on how this change will
impact them.
4. Capital: Last, a cornerstone principle of creative destruction is capital. Making sweeping,
radical innovate changes is often expensive, and companies must be prepared to take on
financial risk to make this change. Most often, companies will seen venture
capital investments to aid with funding the creative destruction.

Creative destruction can be seen across many industries. As all industries try to do well in their field,
many businesses try to seek new ways to better business opportunity and growth. Some of them are:
Technology based industry, Media and Entertainment industry, Retail industry, Finance, Energy
industry.
Limitations of creative destruction :
Though creative destruction can lead to many long term positive aspects of economic growth and
innovation, it has some limitations. As old industries and technologies are replaced, jobs can be lost.
This term leads to unemployment and sufferings for those who are replaced. This can also take time
for new jobs and industries to emerge.

The profit incentives for innovation:

In today's world, innovation is a key driver of economic growth and progress. Intellectual property
protections play a major role in encouraging innovation by providing incentives for individuals and
businesses to invest in new ideas and technologies. Intellectual property refers to creations of the
mind, such as inventions, literary and artistic works, designs, and symbols. These creations can be
protected by various forms of intellectual property law, including patents, trademarks, and
copyrights. By providing legal protections for these creations, intellectual property law encourages
innovation by ensuring that individuals and businesses can reap the rewards of their investments.

Here are some key insights into how

intellectual property protections encourage
innovation:
1. Patents provide inventors with a
period of exclusivity during which
they can profit from their invention.
This exclusivity can be a powerful
incentive for inventors to invest time
and money into developing new
technologies. For example, the
pharmaceutical industry relies heavily
on patents to protect their
investments into new drug
development. Without patent
protections, it would be difficult for
these companies to recoup their
investments and fund future research
and development.
2. Trademarks protect brands and logos, which can be valuable assets for businesses. Trademark
protections can provide businesses with the confidence to invest in building a brand, knowing
that they will be able to protect it from competitors. For example, the Nike "swoosh" logo is a
valuable trademark that has become synonymous with the Nike brand. Without trademark
protections, it would be difficult for Nike to prevent competitors from using a similar logo to
sell their products.
3. Copyrights protect original works of authorship, such as books, music, and movies. By
providing creators with legal protections, copyrights encourage the development of new and
original works. Copyrights also provide creators with a way to earn income from their
creations, which can be a powerful incentive for artists and writers to continue creating new
works.
Intellectual property protections are an essential component of a free enterprise system that
encourages innovation. By providing incentives for individuals and businesses to invest in new ideas
and technologies, intellectual property law helps to drive economic growth and progress. Whether it
is through patents, trademarks, or copyrights, intellectual property protections play a critical role
in turning ideas into reality.