Case 2 Economic Innovations 23-09-2022
What do economists mean by innovations?
Innovation = the successful exploitation of new ideas (commercial application). Innovation
results from these three steps:
1. Research and creativity (obtain new knowledge) Creativity = process or an action,
difficult to describe due to lack of rules
2. Invention = result of creativity, new ideas
3. Design and development (development = a channel in the creativity process, besides
the design)
4. Innovation
Swann: According to economist, an innovation is the commercial application of an invention.
An invention is a generation of new ideas through research or other forms of creativity
(Swann, 2009). It should be an idea in terms of value, profit or be bought and sold on the
market. According to economics, an innovation is the successful exploitation of new ideas!
Difference innovation vs. invention
It is also common to differentiate between invention and innovation, the latter being
characterized by its diffusion: an invention with no market, is thus not an innovation
- Invention: generation of new ideas through research or others forms of creativity
- Innovation: the commercial application of invention. So you need to have an
invention to generate an innovation
Uncertain and successive improvements when innovating
- Innovating is an uncertain activity since you never know how the innovation is
evaluated by the customers/society and what the exact impact is
- The fact that new technologies come into the market in a primitive/embryonal form
which can be improved and widely adopted only after its first introduction highlight
Knowledge as a good
From an economic analysis perspective, knowledge is a public good: it cannot easily be
appropriated by one agent, because to be validated it needs the openness to the critique of
, the scientific community and because its diffusion creates positive externalities, it is a non-
rival good: who uses it does not "consume" it, and thus does not deprive someone else from
using it finally, it is cumulative, with increasing returns.
Which types of innovations exist?
Types of innovation
1) Product innovation:
a. Creation of a new improved product for sale without changing the production
process – except that more input is required (e.g. improvements to a
medication).
b. It is the introduction of goods or services that are new or have gone through
significant improvements related to the characteristics or purpose of using
the product and its benefits.
c. Three characteristics can be used for approaching an product innovation:
intrinsic, perceptual, extrinsic. An innovation is not always interesting for
every consumer, when the innovation made the product too expensive (not
on their WTP), they won’t buy the new version. E.g. medicine and drugs
i. Intrinsic attributes: Appearance, odour, taste/flavour and texture
ii. Extrinsic attributes: Price, origin, nutritional content, branding etc.
iii. Perceptual: the way persons look at the product: high quality/low
quality etc.
2) Process innovation
a. Changes in the way in which a product is made (e.g. improvements in the
process of creating a medication). It means the implementation of a new or
significantly improved production or delivery method (including significant
changes in techniques, equipment and/or software).
b. An economic view, this will change the marginal and fixed costs which can be
seen in the cost curve. The most common will be reducing marginal costs and
increase fixed costs. Examples of a process innovation are marketing, supply
chain or business model innovations.
3) Organizational innovations
a. Changes in the way an organization functions (e.g. hospital reorganization,
outsourcing) (see more in case 4).
Product proliferation:
- Similar basic product different pricing (price discrimination) and difficult to enter the
market (anti-competitive)
- Occurs when organizations market many variations of the same products. This can be
done through different colour combinations, product sizes and different product
uses. This produces diversity for the firm as it is able to capture its sizable portion of
the market.
Fixed costs: are set costs, do not change due to outcome changes VS
Marginal costs: do change if output changes
What do economists mean by innovations?
Innovation = the successful exploitation of new ideas (commercial application). Innovation
results from these three steps:
1. Research and creativity (obtain new knowledge) Creativity = process or an action,
difficult to describe due to lack of rules
2. Invention = result of creativity, new ideas
3. Design and development (development = a channel in the creativity process, besides
the design)
4. Innovation
Swann: According to economist, an innovation is the commercial application of an invention.
An invention is a generation of new ideas through research or other forms of creativity
(Swann, 2009). It should be an idea in terms of value, profit or be bought and sold on the
market. According to economics, an innovation is the successful exploitation of new ideas!
Difference innovation vs. invention
It is also common to differentiate between invention and innovation, the latter being
characterized by its diffusion: an invention with no market, is thus not an innovation
- Invention: generation of new ideas through research or others forms of creativity
- Innovation: the commercial application of invention. So you need to have an
invention to generate an innovation
Uncertain and successive improvements when innovating
- Innovating is an uncertain activity since you never know how the innovation is
evaluated by the customers/society and what the exact impact is
- The fact that new technologies come into the market in a primitive/embryonal form
which can be improved and widely adopted only after its first introduction highlight
Knowledge as a good
From an economic analysis perspective, knowledge is a public good: it cannot easily be
appropriated by one agent, because to be validated it needs the openness to the critique of
, the scientific community and because its diffusion creates positive externalities, it is a non-
rival good: who uses it does not "consume" it, and thus does not deprive someone else from
using it finally, it is cumulative, with increasing returns.
Which types of innovations exist?
Types of innovation
1) Product innovation:
a. Creation of a new improved product for sale without changing the production
process – except that more input is required (e.g. improvements to a
medication).
b. It is the introduction of goods or services that are new or have gone through
significant improvements related to the characteristics or purpose of using
the product and its benefits.
c. Three characteristics can be used for approaching an product innovation:
intrinsic, perceptual, extrinsic. An innovation is not always interesting for
every consumer, when the innovation made the product too expensive (not
on their WTP), they won’t buy the new version. E.g. medicine and drugs
i. Intrinsic attributes: Appearance, odour, taste/flavour and texture
ii. Extrinsic attributes: Price, origin, nutritional content, branding etc.
iii. Perceptual: the way persons look at the product: high quality/low
quality etc.
2) Process innovation
a. Changes in the way in which a product is made (e.g. improvements in the
process of creating a medication). It means the implementation of a new or
significantly improved production or delivery method (including significant
changes in techniques, equipment and/or software).
b. An economic view, this will change the marginal and fixed costs which can be
seen in the cost curve. The most common will be reducing marginal costs and
increase fixed costs. Examples of a process innovation are marketing, supply
chain or business model innovations.
3) Organizational innovations
a. Changes in the way an organization functions (e.g. hospital reorganization,
outsourcing) (see more in case 4).
Product proliferation:
- Similar basic product different pricing (price discrimination) and difficult to enter the
market (anti-competitive)
- Occurs when organizations market many variations of the same products. This can be
done through different colour combinations, product sizes and different product
uses. This produces diversity for the firm as it is able to capture its sizable portion of
the market.
Fixed costs: are set costs, do not change due to outcome changes VS
Marginal costs: do change if output changes
