10.8 Technological Advance and Competition

Why did the basic pure‑competition model assume all firms had the same cost curves?

For simplicity — so competition was only through entry and exit, not innovation.

Why is this type of competition called “copycat competition”?

New firms duplicate existing firms’ technology and cost curves to copy their profits.

What is missing in copycat competition?

Innovation — no new products, no new technology, no dynamism.

Why do entrepreneurs want more than normal profit?

Normal profit is guaranteed in long‑run perfect competition, so they seek above‑normal profit.

What are the two strategies entrepreneurs use to earn above‑normal profit?

• Lower production costs with better technology or organization.

• Create a new product that no one else produces.

Why does lowering production costs increase profit in perfect competition?

Price stays the same (firms are price takers), but costs fall, so profit rises.

Why is this advantage temporary?

Other firms eventually copy the innovation, eliminating the cost advantage.

Why can a firm earn above‑normal profit with a new product?

It is the only producer, so it can charge a price above cost.

Why doesn’t this advantage last?

Competitors eventually enter or create better products, eroding profits.

What is creative destruction?

The process where new products and technologies destroy old industries.

Who popularized the concept of creative destruction?

Economist Joseph Schumpeter.

According to Schumpeter, what is the most important type of competition?

Competition from new products, new technologies, new business models.

Why is this type of competition so powerful?

It attacks firms at their foundation, not just their profit margins.

Does creative destruction only work when new products exist?

No — even the threat of innovation forces firms to improve.

Give examples of industries destroyed by new technologies.

• Wagons → railroads → trucks → airplanes

• Live theater → movies → TV → streaming

• Records → cassettes → CDs → MP3s → smartphones

• Malls → Amazon/e‑commerce

What do these examples show?

Innovation constantly replaces old products and raises living standards.

What are the benefits of creative destruction?

• New products

• Lower costs

• Higher productivity

• Economic growth

• Rising living standards

Why is creative destruction essential for economic growth?

It reallocates resources to more efficient and higher‑value uses.

Who bears the costs of creative destruction?

Workers in declining industries who cannot easily transition.

Why can creative destruction be painful?

• Job losses

• Industry collapse

• Towns dependent on one employer can be devastated

Why do some workers struggle more than others?

The pace of change may be too fast, or they may lack transferable skills.

Are the overall effects of creative destruction positive or negative?

Positive overall — growth and higher living standards.

Why is the distribution of costs and benefits uneven?

Benefits are widespread, but costs are concentrated on displaced workers.