Pg. 290-293

Romer argues that the accrual of knowledge is of greater significance than the supply of physical factors. Romer supports his theory by discussing that the raw materials used to manufacture products were virtually the same, but recently the process in which these materials are combined into consumer products has become exceptionally more efficient. The book uses the example of how many different ways iron oxide is used today compared to a century ago when its only use was as a pigment. Now it is used to make products like televisions and video tape recorders. During his studies of rival and nonrival goods, Romer realized how Kenneth Arrow's negativity towards new ideas was the wrong way of approaching the issue. Arrow rejected new ideas because of the "irreducible 'lumpiness'" which Romer discovered to be the fixed cost of a "new set of instructions". Romer argued that new ideas are worth the initial fixed cost because an unlimited number of people can use an idea at the same time, an typically, the usefulness of the idea will not diminish. These fixed costs explain the relationship of specialization to market size, but bigger markets usually sell more of the same design. Romer's Buffalo model was a revised and improved version of his telegraphic model in 1987. The original model was constructed around the idea that population was the key. If that were true then populous countries would have surpassed smaller country's economies long ago. The Buffalo model proved that it was new ideas by highly skilled professionals that was the key factor in growth. Its also important to know that new ideas affect the economy in a different way than the manufacturing of products because ideas are able to be copied and used by an unlimited number of people at once without cost.