ECO404 Managerial Economics GDB 1 Solution Spring 2014

Pakistan recently joined the 3G and 4G club by issuing licenses to Telecom companies. It is being considered giant leap for Pakistan. Four cellular companies, Mobilink, Telenor, Ufone and Zong took part in bidding. All four companies got 3G license while Zong also got 4G license. Due to 3G services faster data connectivity will be available to mobile phone users which means one can download with highest speed vis a vis faster web surfing will be a lot more fun. Due to this technology, people will attain uninterrupted video streaming on phones, enable video calls and big MMSs. Telecom industry experts hope that the number of high-speed data users will grow in Pakistan between 25 million and 45 million by 2020, which will add around Rs.400 billion to the economy and Rs.23 billion to tax revenues. Additionally the introduction of the new technology would create 100,000 new jobs and revolutionize e-commerce, e- learning, e-security etc. Launching of 3G and 4G technology will increase the demand for 3G mobile phone handsets.


Carefully read the above scenario and find out which theory of profit will apply to 3G mobile phone handsets dealers and why? Give reason.

Solution: Innovation theory of profit will apply to 3g mobile phone handsets dealers because they introducing new methods of production.

The innovation theory of profit was developed by Joseph A. Schumpeter. Schumpeter was of the opinion that factors such as emergence of interest and profits, recurrence of trade cycles are only incidental to a distinct process of economic development; and certain principles which could explain the process of economic development would also explain these economic variables or factors. Schumpeter’s theory of profit is thus embedded in his theory of economic growth.
In his explanation of the process of economic growth, Schumpeter began with the state of stationary equilibrium, characterized by equilibrium in all spheres. Under conditions of stationary equilibrium, total receipts from the business are exactly equal to the total cost outlay, and there is no profit. According to the Schumpeter’s theory, profit can be made only by introducing innovations in manufacturing technique, as well as in the methods of supplying the goods. Sources of innovation include:
1. Introduction of new commodity or a better quality good;
2. Introduction of new method of production;
3. Opening of a new market;
4. Discovery of new sources of raw material; and,
5. Organizing the industry in an innovative manner with the new techniques.