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Example research essay topic: Intellect Economics Increasing Returns - 1,315 words

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Introduction Our understanding of how markets and businesses is an understanding based squarely upon the assumption of diminishing returns: products or companies that get ahead in a market eventually run into limitations, so that a predictable equilibrium of prices and market shares is reached. The theory was in rough measure valid for the bulk-processing, smokestack economy of Marshalls day. And it still thrives in todays economics textbooks. But steadily and continuously in this century, Western economies have undergone a transformation from bulk-material manufacturing to design and use of technology from processing of resources to processing of information, from application of raw energy to application of ideas. As this shift has taken place, the underlying mechanisms that determine economic behavior have shifted from ones of diminishing to ones of increasing returns. Increasing returns are the tendency for that which is ahead to get farther ahead, for that which loses advantage to lose further advantage.

They are mechanisms of positive feedback that operate within markets, businesses, and industries to reinforce that which gains success or aggravate that which suffers loss. Increasing returns generate not equilibrium but instability: If a product or a company or a technology one of many competing in a market gets ahead by chance or clever strategy, increasing returns can magnify this advantage, and the product or company or technology can go on to lock in the market. More than causing products to become standards, increasing returns cause businesses to work differently, and they stand many of our notions of how business operates on their head. Mechanisms of increasing returns exist alongside those of diminishing returns in all industries. But roughly peaking, diminishing returns hold sway in the traditional part of the economy the processing industries.

Increasing returns reign in the newer partake knowledge-based industries. Modern economies have therefore become divided into two interrelated, intertwined parts two worlds of business corresponding to the two types of returns. The two worlds have different economics. They differ in behavior, style, and culture. They call for different management techniques, different strategies, different codes of government regulation. They call for different understandings.

Alfred Marshall and Classic Economics (Diminishing Returns) In order to understand the term Increasing Returns, first we must define Diminishing Returns. In Marshalls world of 1880 s and 1890 s, there was bulk production which consisted of iron cores, mining, coffee planting, lumber and coal production, mostly depended on resources rather than know-how. Still in some cases where bulk production is the case, much of human economic activity suffers from diminishing returns. For example, in farming, the farmer will first farm the most fertile land with the most valuable crops.

To expand the farm's business, the farmer will have to cultivate progressively less fertile land and will have to grow less valuable crops (once the demand for the most valuable crop has been met). If a coffee plantation expanded production it would ultimately be driven to use land less suitable for coffee would run into diminishing returns. So if coffee plantations competed, each would expand until it ran into limitations in the form of rising costs or diminishing profits. The market would be shared by many plantations, and a market price would be established at a predictable level depending on tastes for coffee and the availability of suitable farmland. Planters would produce coffee so long as doing so was profitable, but because the price would be squeezed down to the average cost of production, no one would make a killing. Marshall said such a market was in perfect competition.

In general, the bigger a business gets, the less optimal its last venture. Today, we can still see the diminishing returns in economy related with bulk production. Product names and brands tell us that there are few companies rather than many but if these companies wanted to expand their business, they would face some limitations in number of consumers preferring thier brand, in regional demand or in access to resources or raw materials. And because these products have close substitutes, there would occur an equilibrium or a standart price. There is always a margin and noone can dominate the whole industry. The World of Increasing Returns There is another approach in economics which was brought to attention by W.

Brian Arthur, called Increasing Returns. Lets see what happens if a product becomes popular and gets ahead and therefore becomes more popular and dominates the market... The software industry and the operating systems shows increasing returns. If one system gets ahead, it attracts further software developers and hardware manufacturers to adopt it, which helps it get further ahead. In 1980 s, when Dos, Apples Macintosh sytems and CP/M were competing, increasing returns started to play its role. CP/M was first in the market and by 1979 was well established.

The Mac arrived later but was wonderfully easy to use. DOS was born when Microsoft locked up a deal in 1980 to supply an operating system for the IBM PC. For a year or two, it was by no means clear which system would win. The new IBM PCDOSs platform was a kludge. But the growing base of DOS/IBM users encouraged software developers such as Lotus to write for DOS. DOSs prevalence and the IBM PCsbred further prevalence, and eventually the DOS/IBM combination came to dominate a large portion of the market.

That history is well known. But there are several things to be noticed: It was not predictable in advance (before the IBM deal) which system would come to dominate. Once DOS/IBM got ahead it locked in the market because it did not pay users to switch. The dominant system was not the best: DOS was derided by computer professionals. And once DOS locked in the market, its sponsor Microsoft was able to spread its costs over a large base of users and gained enormous revenue. Furthermore, customers find extra value from buying software from a bigger vendor: because more other people use the software, it is easier to exchange files in its data format, it is easier to hire staff that is trained in the use of the software, and it is even easier to find books that explain how to use the software.

In other words, the more other people buy a software product, the more likely you are to buy it yourself. A major part of the economy in fact was subject to increasing returns high technology. There are several reasons for that: Up-front Costs: High-tech products pharmaceuticals, computer hardware and software, aircraft and missiles, telecommunications equipment, bioengineer ed drugs, and suchlike are by definition complicated to design and to deliver to the market place. They are heavy on know-how and light on resources. Hence they typically have R& D costs that are large relative to their unit production costs. The first disk of Windows to go out the door cost Microsoft $ 50 M, the second and subsequent disks cost $ 3.

Unit costs fall as sales increase. Network Effects: Many high-tech products need to be compatible with a network of users. So if much downloadable software on the Internet will soon appear as programs written in Sun Microsystems Java language, users will need Java on their computers to run them. Java has competitors. But the more it gains prevalence, the more likely it will emerge as a standard. Customer Groove-In: High tech products are typically difficult to use.

They require training. Once users invest in this training say the maintenance and piloting of Airbus passenger aircraft they merely need to update these skills for subsequent versions of the product. As more market is captured, it becomes easier to capture future markets. In high-tech markets, such mechanisms ensure that products that gain market advantage stand to gain further advantage, making these markets unstable and subject to lock-in. Of course, this domination of the market is not forever. Technology comes in waves, and being dominant...


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Research essay sample on Intellect Economics Increasing Returns

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