Use the Word document already provided to answer all questions.
Caiden
economics-chp-16.pptPowerPoint Slides prepared by: Andreea CHIRITESCU Eastern Illinois University
The Knowledge Economy
*
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
CHAPTER 16
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Everything Has Changed
- Knowledge, learning economy
Knowledge and information are the crucial elements in the economy
Recent information and communication technologies
Digital technology
*
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Everything Has Changed
- Changes in the business landscape
Supply chains of many businesses were destroyed or decomposed
Private property rights have been altered
Increasing rather than diminishing marginal returns may occur
Networks have become important
*
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Supply Chain Decomposition
- Technological changes
Information content of a good can be distinguished from the physical product
Fundamentally different business
Information content of a newspaper
No longer has to be tied to the actual physical newspaper
*
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Supply Chain Decomposition
- Technological changes
Information content of an automobile purchase
Does not have to be tied to an auto dealership
Information content of banking
Does not have to be tied to the physical presence of a bank
*
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Figure 16.1
New technology separates information from physical product.
Supply Chain for Newspaper
*
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Intellectual Property Rights
- Separation of physical product and information
Changes the allocation of private property rights
More difficult to “own” information
Almost impossible to enforce the ownership
- Public good
Anyone can use it
No one’s use will diminish it for someone else to use
*
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Intellectual Property Rights
- Lack of private intellectual property rights
As soon as an innovation is made public
Others can duplicate the process and sell a comparable product
Without having to bear the costs of the research that allowed for the innovation
*
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Intellectual Property Rights
- Information has value
Information can be separated from the physical product
More difficult to
Erect barriers to entry
Create monopolies
Maintain property rights
*
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Intellectual Property Rights
- Information - costly to create
Virtually free to distribute
- Once the information is provided
It is a public good
Difficult to maintain the private property rights
Problem for any business that has high start-up costs and very small marginal costs
MR=MC at about 0 and P < initial costs
*
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Figure 16.2
MR = MC near zero. The firm is unable to charge a high enough price to earn a profit because rivals drive price to MC.
Start-up costs are high and marginal costs very low
*
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Intellectual Property Rights
- Patents, copyrights
Protect intellectual property
Confer a property right
A right to the exclusive ownership of the patented product or process
Copyright on the creative endeavor
*
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Intellectual Property Rights
- Government-granted monopolies
If perfectly enforced:
Create the private property rights
Ensure the holders of those rights a return on their investment
Digital technology - the government monopoly is not enforceable
*
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Intellectual Property Rights
- The Economics of Free
Give away those items for which private property rights cannot be enforced
Musical groups – give away their CDs
Earn more from concerts
Websites and search engines - give away their services
Earn money on advertising
Gaming industry
Ad-supported casual games online
Free-to-try massively multiplayer online games
*
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Intellectual Property Rights
- The Economics of Free
Inventors: create a business model that pays up front
Various spinoffs and short-term advantages
Bundling of products
Tie-Ins that wed a product to a service
*
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Business Insight
Gillette
- King C. Gillette - disposable razor blade
1903: sold 51 razors and 168 blades
Marketing for razors: discounts & freebies
To the Army at a steep discount
To banks - give them away with new deposits
Bundled with everything from Wrigley’s gum to packets of coffee, tea, spices, and marshmallows
Creating a demand for disposable razor blades
*
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Increasing Returns and Networks
- Law of diminishing marginal returns
As a variable resource is increased in combination with fixed quantities of other resources
Marginal productivity will initially rise but eventually will decline
- Output function, consulting firm: Q = f(K*L)
K* - capital is fixed for a period of time
Buildings and equipment
*
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Increasing Returns and Networks
- New technology
Enables more consultants to work out of the office without any loss in productivity
- Q = f[(1 + a)K*L]
Fixed capital is expanded by the new technology
If a doesn’t change - diminishing returns
If a changes each period - increasing returns
*
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Increasing Returns and Networks
- Increasing returns
Each additional worker is adding increasing amounts of additional output
- Combining additional resources
With a fixed amount of capital
Decline in the productivity of the resources
Diminishing returns
With an increasing amount of capital
Increase in productivity
Increasing returns
*
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Figure 16.3
In Figure 16.3(a), the average product curves are drawn. These indicate how adding more workers to a fixed quantity of capital leads to diminishing returns—the downward-sloping curves. But as the quantity of capital is increased, the product curve shifts out. This reflects increasing returns. In Figure 16.3(b), the average cost curves are shown. These also show diminishing returns in their U-shape, but as capital is increased, the curves shift out, showing that more output leads to lower average costs—increasing returns.
Increasing and Diminishing Returns
*
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Increasing Returns and Networks
- Network effects (network externalities)
The benefits to an individual of joining a network
Go to every member of the network
Not just the member joining
*
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Increasing Returns and Networks
- Value of a network to each individual member
Rises as the number of members rises
If proportional to the number of users who can interconnect
For n users: value is proportional to n(n – 1) = n2 – n
*
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Internal Organization and Knowledge
- Knowledge workers
Nonproduction workers
People who deal with information and knowledge
- Distributed knowledge
Knowledge that is not possessed by any single mind
*
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Business Insight
The Water Cooler
- Conversations by the water cooler
Valuable time being used to share experiences
- Intel – deliberate approach to knowledge worker productivity
Studying social networking
Improving work processes based on the results
*
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Business Insight
The Water Cooler
- Intel’s Information Work Productivity Council study, 2003
A company’s best performers were proficient at building effective knowledge networks on the job
*
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Markets vs. Authority with Knowledge Workers
- Challenge traditional authority relations:
Growth of knowledge workers
Have more bargaining power
Can create hold-up problems
Inefficient exercise of authority through direction
Increasingly distributed knowledge
*
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Markets vs. Authority with Knowledge Workers
- Role of a manager in a knowledge firm
Elicitor of knowledge – primary role
Monitoring - less important
Or more costly
Dealing with free-riding
In team-work
Well-defined and enforced private property rights and economic freedom
*
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Markets vs. Authority with Knowledge Workers
- Innovators
Mostly found in new, upstart firms
Small firms are more nimble and less bureaucratic than large ones
Conspiracy theories
Dominant firms keep innovations hidden away
Or buy up and hide the innovations of small upstart firms
*
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
Markets vs. Authority with Knowledge Workers
- Established firms - less able to innovate
Lag with the introduction of innovations
Entrepreneurs
Start new firms
Rather than provide innovations to the large firms
Appropriate to delay entering a new venture
Until some upstart has shown there is a market
Sunk cost effect
Already committed to a particular technology
Fails to switch technologies because of prior expenditures
*
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
© 2012 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part, except for use as permitted in a license distributed with a certain product or service or otherwise on a password-protected website for classroom use.
