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Economic Theory

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Solow Economic Theory

The Solow economic theory assesses shifts in an economy's output level brought on by

population growth, technological advancements, and changes in the saving rate. Robert Solow,

an economist, created the idea, which serves as the foundation for the current theory of economic

growth. According to Solow's view, all consumers in an economy maintain their savings in a

fixed proportion. This hypothesis presupposes that population increase proceeds continuously

(Gumpert, 2019). The theory further implies that every investment in an economy produces

goods and services using a similar production method. The long term is what the Solow

economic model highlights. The Solow economic model states that saving and investment are

essential for economic growth (Zhang, 2019). The capital stock would suffer if saving and

investment rates change in an economy.

Porter’s Economic Theory

Porter’s economic theory has five competitive forces that rank each industry according to

its strengths and weaknesses; as a result, Porter's model is frequently used to gauge the level of

competition in a given sector (Bruijl & Gerard, 2018). Porter's economic theory focuses on

analyzing the power of a firm's competitive rivals, potential new markets, suppliers, markets, and

customers.

 The level of industrial competition. Porter's model states that a corporation

has less power, the more competitors there are, and the more similar goods and services
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they provide ( Isabelle et al., 2020). Suppliers and customers always favor businesses that

can offer better deals or things for less money. When there is little competition•

 Potentially increased industrial competition. The emergence of a new

competitive company impacts the power of a company. An industry with solid barriers to

entry is advantageous for existing companies within that industry since the company

would be able to increase its costs and negotiate better terms. The less time and money it

takes for a competitor to enter a company's market and be an effective competitor, the

more seriously their position could be affected (Wang & Liu, 2021).

 The influence of suppliers. How many suppliers there are for critical

inputs, how distinctive these inputs are, and how much it would cost a company to

transfer suppliers all have an impact on businesses. A corporation would be more

dependent on the industry's suppliers if there were fewer.

. On the other hand, when there are many suppliers or low switching costs

between rival suppliers, a company can keep its input costs lower and enhance its profits.

 The influence of consumers. Customers have the power to influence a

company's product pricing. This is affected by a company's total number of buyers, the

value of each customer, and the expense of acquiring new clients or markets for its

goods. Each customer has greater leverage to bargain for lower pricing and better deals

because the market is smaller and more powerful.

 The threat of substitutes. Threats from substitute items or services that can

displace a company's goods or services are significant. Companies with the ability to
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raise prices and secure advantageous terms will be those that make items or provide

services for which there are no direct alternatives.

How Porter’s Economic Theory can be used and how it can affect Nigeria’s

Economy.

According to Porter's theory, these are four factors that are useful in maintaining the

competitive ability. These include: factor conditions, demand conditions, related and supporting

industries and firm strategy, structure and rivalry. Factor conditions demonstrate how far the

factor of production in a country can be utilized successfully in a particular industry (Ambec et

al.,2020). Nigeria can utilize this factor by identifying a product that has high demand in the

domestic market and improving the competitive ability of the product hence generate economic

growth. Nigeria can apply the theory to attain a national competitive advantage by forming a

close working relationship with the competitor countries and which will challenge them to

produce better quality goods at a lower cost hence survive the global market and develop its

economy. Nigeria can also apply the theory to make strategic decisions that have a lasting effect

on their competitiveness hence gaining greater competitive strength for the country.

Conclusion
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In conclusion, this study has discussed two economic theories namely, Solow economic

theory and Porter’s economic theory. Solow economic theory evaluates changes in the level of

output in an economy due to changes in the saving rate, population growth and development in

technology hence forms the basis for the modern theory of economic growth. Porter's economic

theory focuses on analyzing the power of a firm's competitive rivals, potential new markets,

suppliers, markets, and customers.

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References

Ambec, S., Cohen, M. A., Elgie, S., & Lanoie, P. (2020). The Porter hypothesis at 20: can

environmental regulation enhance innovation and competitiveness? Review of

environmental economics and policy.

Bruijl, D., & Gerard, H. T. (2018). The relevance of Porter's five forces in today's innovative and

changing business environment. Available at SSRN 3192207.

Couix, Q. (2019). Natural resources in the theory of production: the Georgescu-Roegen/Daly

versus Solow/Stiglitz controversy. The European Journal of the History of Economic

Thought, 26(6), 1341-1378.

Gumpert, M. (2019). Regional economic disparities under the Solow model. Quality & Quantity,

1-21.

Isabelle, D., Horak, K., McKinnon, S., & Palumbo, C. (2020). Is Porter's Five Forces Framework

Still Relevant? A study of the capital/labour intensity continuum via mining and IT

industries. Technology Innovation Management Review, 10(6).

Wang, K., Li, G., & Liu, H. (2021). Porter effect test for construction land reduction. Land Use

Policy, 103, 105310.

Zhang, W. B. (2019). Economic growth and the Taylor rule in the solow-Tobin model. Asian

Business Review, 9(2), 49-56.

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