What Drives Innovation?

My post yesterday considered the tipping point regarding folks moving back into the urban core.  While I suggested the number might be closer to $7.00 a gallon, I failed to address two important economic aspects to this argument, price elasticity and innovation.

If as suggested in my previous post, gasoline prices reach $7.00 a gallon push more of the population into the urban core, the prices for those properties will increase according to this demand curve.  For this example let’s suggest a family moves into the urban core reducing their driving by 200 miles a week.  The monthly savings of 800 miles month not traveled (at 20 mpg) is 40 gallons multiplied by $7.00 equals a monthly gasoline savings of $280.  Such a cost savings would likely be very attractive to many purchasers creating increased demand for such housing.  The increased demand will create upwards pressure on urban housing prices in these areas until such a time that it wipes out the effective cost savings.

Meanwhile on the other side of the demand curve let’s suggest 1,000 families make the move to the urban core and use 40 gallons less fuel each month.  This would mean 40,000 fewer gallons of gasoline were being consumed thus lowering the demand curve for gasoline and negatively impacting the price.  In addition, the families moving out of the suburban and rural areas are creating less demand for housing in these areas thus lowering the prices that can be achieved.  Under this scenario, less affluant buyers will find more housing in the suburban areas where the barriers to entry are lower but the commuting costs (which do not have to be paid upfront) are higher. 

Such equilibrium in the market will keep gas demand relatively equal.  This is where innovation comes into play.  The transportation innovation of the streetcar helped build cities outer edges with residential housing.  The automobile provided the world will even more mobility followed by the innovation of the interstate highway system and telecommuting (working from a home or remote office).  Mainstream car companies are selling hybrid fuel vehicles faster than they can assemble them.  The next innovation to impact human settlement patterns may be hydrogen fuel cells or it may be something else entirely.

Innovation occurs naturally when the forces of need place pressures on the creative minds of a generation to solve the need. But as just as Theodore Levitt said “Creativity is thinking up new things. Innovation is doing new things.”  I fully anticipate that by 2012 the standard vehicle in the United States will be smaller than today and may run, at least partially on alternative energy.  The economic pressures to create such a vehicle are immense and the economic cost to those companies that do not adapt will be extinction.

Other adaptions I see in our future include:

• Housing in 2012 will be more energy efficient (but not smaller) and energy audits may become an important part of the standard home inspection.   
• By 2012, nuclear energy generation will gain in acceptance and at least four new nuclear power plants will come on line before 2020.

All of these advances will occur thanks to the ingenuity and inventiveness of the human race (not just Americans) when faced with the economic realities of the 21st century.

       

Tags: affordable housing, economics, gasoline, innovation