Chapter 1 What Is Economics? 31
Research and development (R&D) is the
key to realizing the potential of innovation. It is
an investment in the future. In simple terms, the
innovator comes up with a new idea, explores
its practicality, and turns it into a new product
or service. Businesses, universities, and govern-
ment agencies all participate in research and
development, both independently and in coop-
eration with each other.
The U.S. invests more money in research
and development than any other country in the
world. This is one reason America is among the
most prosperous nations. The same is true of busi-
nesses. Those that invest the most in research and
development tend to be the most competitive and
successful.
Technological advances are a major force in the creation of new prod-
ucts and services. Technology is the application of scientifi c knowledge to
practical uses and product development, 1-5. Computers, cell phones, and
fuel-effi cient cars are examples of technological advances.
The companies providing the best products and services at the lowest
prices generally achieve the highest sales and profi ts. Ideally, this results in
higher quality at lower prices for consumers. Competition encourages com-
petence and effi ciency in the production and sale of goods and services.
Electronic products are a good example. Consider the development of
personal media players that started out as simple audio players. Today you can
use these players to view videos, text, photos, and lyrics. You can listen to and
record FM radio, store data, and tell time. You get voice recording and com-
puter interface. All these functions are contained in a player about the size of
a credit card. You are getting more for your money with each new innovation.
Most of this innovation was driven by competition and the profi t motive.
There is also competition in the job market. The highest incomes go to
the educated, trained, and skilled workers who produce the goods and ser-
vices in greatest demand. This demand increases the competition among
workers. They try to update their skills and education in order to qualify
for better jobs, so they can then earn higher incomes and better benefi ts.
This, in turn, improves a company’s ability to compete.
Laws of Supply and Demand
These key principles—private ownership, free choice, profi t motive,
and competition—come together to create a dynamic, ever-changing econ-
omy. Individuals and families are free to act in their own best economic
interests in the marketplace. By doing this, they make the economy work
better for everyone.
Remember the economic challenges common to all societies? In short,
the challenges are: what and how much to produce, how, and for whom.
The U.S. economic system addresses these questions largely by letting the
forces of supply and demand operate in competitive markets. Supply is the
1-5
New technology is constantly
being developed, tested, and
marketed to consumers.