Explain the concept of “creative destruction” by innovation. Does it ensure positive economic profits in the long run?

Question

What will be an ideal response?

Answer 1

Creative destruction begins when the alert innovative entrepreneur creates or recognizes a new and better product, acquires it, and brings it to market, where it makes older substitutes obsolete. As the first provider of the improved product, the entrepreneur initially faces little or no competition, and the resulting monopoly power enables the entrepreneur to sell the new product at a price that is high relative to its costs and yields abundant profit. This generous profit gets the attention of other individuals with entrepreneurial ambitions, who seek to enter the market with competitive and imitative products. This competitive entry first reduces and finally brings to an end the temporary excess of price over the competitive level that was initially enjoyed by the entrepreneur.