4.1.4.8 Technological change

Technological change and high cost technology

firms adapting to technological change can require large costs in the form of capital and research and development These high potential fixed costs can lead to potential for economies of scale. For very high levels of output, the average fixed costs will be much lower. This will improve productive efficiency.

Technological change and barriers to entry (high cost and low cost tech)

High cost technology can act as a barrier to entry and restrict the number of firms capable of entering the market. In some industries eg car manufacturing, the minimum efficient scale is very high and initial fixed costs of new capital technology are very high. However in some markets such as retailing new low cost technology has reduced the minimum efficient scale, allowing the market to become more contestable. In these markets, tech change increases the number of firms and makes the market more competitive.

Product innovation

A launch of a new good or service which has improved on the previous version. Creates a unique selling point PED could be more inelastic due to a more unique product. The firm can charge a higher price and get greater revenue.

Process innovation

A new way of producing a good or service. This will lower production costs for the firm. The firm could lower price or keep price the same to increase profit.

Innovation

Improving or contributing to existing products

Creative destruction

In 1942, Joseph Schumpeter coined the term. The incessant process by which innovation and new technology lead to new production processes which replace old. Sudden changes in technology, innovation or invention gives market power to the owners of this new technology, allowing them to compete with well established but technologically inferior firms. Eventually the firms with new technology will gain market power at the expense of established firms, often forcing out an oligopolistic market and transferring in the short run to a more competitive one due to product differentiation. However in the long run the market reverts to oligopoly but with new market leaders. Usually creative destruction results from the actions of a small competitor. Even where new technology is available, market leaders are reluctant to take actions that would disrupt the market in which they are dominant.

Technological change and market information and knowledge

Information and communication technology has greatly improved information in markets. This enables consumers to make more rational decisions to maximise personal benefit. Greater information also makes it easier for new firms to enter a market and compete with existing firms. Greater information reduces the chance of information failure.

Technological change increasing productivity

Tech change can increase productivity. This can increase productive efficiency and help the economy meet more needs and wants. This increases living standards.

Invention

The process of creating a new product or a new way to make a product

Technological change and productive efficiency

This is when average costs are at their lowest point. This is when MC=AC. Technological change tends to lead to lower average costs. Particularly process innovation.

Production costs: Tech change moves production from labour intensive to capital intensive.

This will mean high costs in the short run but should lead to greater productivity, increasing potential for economies of scale. The shift from labour intensive to capital intensive can lead to technological unemployment.

Technological change and allocative efficiency

Allocative efficiency is a measure of the extent to which the goods and services produced are those that consumers want. This is where AC=MC. Improved communication from tech change can reduce the level of information failure.

Improved quality

Demand tends to increase and become more price inelastic. Technological change means the product may be more flexible and easier to cater to the customer.

Technological change and product differentiation

New technology allows firms to develop unique qualities about their products. This allows for greater differentiation of products. Products which are differentiated and have a unique selling point may become more price inelastic, allowing firms to increase prices. Most firms endeavour to maintain their differentiation through patents and copyrights, which last about 20 years. In addition, if new technology uncovers an invention this can give a firm a monopoly. If new technology uncovers a radically different product, a firm may have the opportunity to enter another market.

Technological change and low cost technology

Some costs in some industries have deacreased due to new technology. So in some industries, firms can increase output without incurring high costs of new technology. Due to the low level of capital expensive there can be a downward shift of LRAC. Barriers to entry decrease and the market becomes more contestable.