ABSTRACT
The nucleus of the connection between microeconomic theory and innovations is embedded in production theory. Production theory is quite universal, and the precise nature of the decision unit that directs the production process is of little concern in production analysis. It should be made very clear that each time an entrepreneur innovates by making a change to bring about a new or improved product or a different production process or develops a new market for an existing product; the production function has been changed. Economic theory used within western capitalistic economies has existed for a mere two hundred years. The two most notable changes were major upheavals in the theoretical explanations of capitalism. The first was the development, implementation, and use of neoclassical economics about one hundred years ago. The new paradigms of neoclassical microeconomic theory and Keynesian macroeconomic theory resulted in a stronger, more complete theory by which economists could explain economic events.
