Innovatie en economie - Impacts of innovation - Innovation and business cycles
3 important questions on Innovatie en economie - Impacts of innovation - Innovation and business cycles
How does innovation impact the business cycle?
Innovation drives economic development, and often implies irreversible changes in the way things are done (the business cycle). This leads to creative destruction, which accentuates both the novel ideas behind innovations and their power to disrupt markets and industries.
What did Schumpeter discover about the impacts of innovation and the business cycle?
He observed that there is often a time lag between an innovation and its widespread adoption. Moreover, the number of discoveries and inventions is high and information about them is relatively easily available, while in contrast, useful innovations are limited in number and normally very few individuals are able to capitalize on them. These individuals are the entrepreneur-innovators, who apply the ideas from inventions and drive them to commercial success.
Which two phases follow innovation founded on entrepreneurship?
- The diffusion phase
The innovation leads to new products with higher utility and often reduced production costs. This disrupts the pricing structure and employment in the existing market and radically changes customers' expectations.
The market equilibrium is disturbed and this triggers a process of market adaptation with many new products being developed and competition intensifying. - The recession phase
Once innovations have diffused throughout an economic system, they lose their power as a source of growth. This leads to a depression and a form of equilibrium is reached in which the value of products and their pricing are largely stable.
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