Research & Development and Innovation

Research & Development and Innovation

Courses Info

Level: AS Levels, A Level, GCSE – Exam Boards: Edexcel, AQA, OCR, WJEC, IB, Eduqas – Economics Revision Notes

Competitive Advantage through Innovation

  • When a firm produces goods / services that are better than it’s competitors, it has comparative advantage
  • A firm can use pricing techniques, quality, cost, or operate in a niche market to gain comparative advantage
  • When a firm lowers its average cost and creates maximum value to its consumers, it gains a cost competitive advantage

Incentive to increase market power

  • Firms can increase their market power by investing into R&D – it can help businesses edge out in the market and differentiate products
  • It can also help firms increase their brand loyalty

Product and process innovation

  • Technological advancements can increase productivity, efficiency and lower the costs of production
  • Changes in technology can also lead to the production of new products, better quality goods / services and the development of new markets
  • SMEs create a competitive market for firms to work in, stimulate innovation / investment and allow the process of ‘creative destruction’ to occur

Role of State Funding

  • Economic growth can occur through increases funding into R&D – unemployment will fall, GDP will rise, and households will have greater incomes
  • However, R&D can sometimes lead to market failure, as the positive externalities are not always fully understood and utilised efficiently – therefore the government can intervene to fund part of the R&D

Product Life Cycle and Extension Strategies


  • Development and Growth Stages – firm is making greater revenue as the sales of growth are increasing. The firm is still researching and developing the product when it is firstly introduced
  • Maturity Stage – the product is being sold in a saturated market – large amounts of revenue can be made, however the firms also faces a huge amount of risk
  • Decline Stage – the sales of the product start to decrease – promotion and advertisement is usually needed at this stage to increase the sales – this can be quite expensive. Firms have to decide whether they should remove the product from the market or if they should engage in extension strategies to increase the sales

Extension Strategies

  • These aim to increase the useful life of a product to increase sales, before it goes into ‘decline’
  • Firms can use marketing techniques, increase brand loyalty and spend more on advertising


Quick Fire Quiz – Knowledge Check

1. Explain how Competitive Advantage occurs in Innovation (4 marks)

2. Explain firms’ incentive to increase their market share (3 marks)

3. Explain the role of technology in product and process innovation (4 marks)

4. Explain the role of state funding (4 marks)

5. Identify and explain the four stages of the Product Life Cycle (8 marks)

6. Identify and explain what extension strategies – provide an example (4 marks)


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