Balance of Industries and Creative Destruction

… a core concept in Economic Analysis and Atlas102

Click for MRU video

Click for MRU video

Concept description

Alex Tabarrok (reference below, video on right) examines why price signals and market competition are so important to a market economy.

Tabarrok says:

“When prices accurately signal costs and benefits and markets are competitive, the Invisible Hand ensures that costs are minimized and production is maximized. If these conditions aren’t met, market inefficiencies arise and the Invisible Hand cannot do its work. In this video, we show how two major processes, creative destruction and the elimination principle, work with the Invisible Hand to create a competitive marketplace that works for producers and consumers.”

He explains how the market induces each supplier to produce the “right” quantity:

IHP2a

The key signal is the relationship between price and average cost (i.e., profit):

IHP2bThis leads to the Elimination Principle and the phenomenon of Creative Destruction.

CreativeDestruction1

Takeaway

Tabarrok summarizes with:

Takeaway2

Practice questions

From http://www.mruniversity.com/node/267267, accessed 7 May 2016.

  1. Let’s review the basic mechanism of the elimination principle with the following questions. When demand rises in Industry X, what happens to profits? Do they rise, fall, or remain unchanged?

Atlas topic, subject, and course

Producer Theory and Competition (core topic) in Economic Analysis and Atlas102 Economic Analysis.

Source

Alex Tabarrok, The Balance of Industries and Creative Destruction (8-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/creative-destruction-definition-elimination-principle, accessed 7 May 2016.

Page created by: Ian Clark, last modified 7 May 2016.

Image: Alex Tabarrok, minute 0.14 of The Balance of Industries and Creative Destruction (8-minute video), Principles of Economics – Microeconomics, Marginal Revolution University, at http://www.mruniversity.com/courses/principles-economics-microeconomics/creative-destruction-definition-elimination-principle, accessed 7 May 2016.