ECON1205 – Price & Market

  1. Overall

Inventors profit from the Schumpeterian rents created by the introduction and dissemination of a new notion.

According to John Van Reenen, to put this theory into practice, Ford’s business must acquire new technology through diffusion, which is unlikely to result in considerable rents because the new processes must be bought at market price. (John Van Reenen. 1996.) Rational employees will experience phantom rents if employers’ incentives to find innovation are decreased.

Entrepreneurial innovation, such as innovative two inputs, organizational structures, one-of-a-kind product availability, or novel technology, is typically used to generate Schumpeterian rents inside the enterprise. Furthermore, if employers’ motivation to come up with fresh ideas is reduced, rational employees may be prepared to accept misleading rents. The more sophisticated the manufacturing technology, the less worker resources are required. (Frederic Sauset, 2014) Furthermore, Schumpeterian rents provide Ford with several options for reducing the cost of materials used in automotive manufacturing. 

Therefore, the isocost line between material and labor is used to determine which option is chosen.

Another source of worry is the entrepreneur’s position at Ford. An entrepreneur, according to Indeed, is someone who establishes and grows a business via their inventive ideas. Entrepreneurs, in addition to making money, play an important role in the success of their company. (Indeed Editorial Team, 2021)

  1. Diagrams of relevant isocost lines and analysis

C is dominated by technology A, while D is dominated by technology B. All other present technologies are vulnerable to e-monopoly. This is because none of the other four technologies are positioned above or to the right of E. We have restricted our input options based only on technical knowledge: C- and D-technologies would never be considered. Choosing A, B, or C implies an assumption about the company’s goals. We suppose that its purpose is to maximize profit by manufacturing fabric at the lowest feasible cost. 

The isocost lines diagrams show the relation ship between the fuels used and labour to produce 10 cars in five technologies A, B, C, D, E.

Technology Number of workers Fuel required
A 1 8
B 4 4
C 2 10
D 5 6
E 9 2


It is assumed that wage cost $10 per worker and fuel cost $50 per tonnes. We have:

Technology Number of workers Coal required Total cost
B 4 4 $240
A 1 8 $410
E 9 2 $190

At these input prices, other viable technologies will not be chosen. It is critical to emphasize that the relative price, not the actual price, is important: if both prices were doubled, the diagram would appear virtually identical: the isocost line through B would have the same slope, even though the cost is £240.


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