Knowledge economy differs from the traditional, physical economy in many ways:

• While physical economy revolves around tangible goods and services and consumes physical raw materials such as iron, coal, and oil, knowledge economy revolves around ideas, knowledge, and discovery.


• Natural raw materials are finite in quantity. Ideas and knowledge are in infinite quantity and are limited only by the imagination of the human race. Knowledge economy uses mental capabilities.


• Physical economy suffers from the law of diminishing returns. Knowledge economy is driven by the law of increasing returns.


• An important force driving the law of increasing returns is the network effect. At its very basic, network effect means as more users sign up to use the network, the value of the network increases to its users. Increasing returns also mean the more you know, the more you'll be able to learn. This is the notion of absorption capacity in the field of technology management.