4.1.4.8 - Technological change

Invention =

Discovery or creation of something brand new

Innovation =

Improvement of something that already exists, or implementation to another problem.

• i.e. Taking an invention and applying it in a way that creates value by improving upon it, or finding new uses for it.

Technological Change =

The overall effect of invention, innovation and the diffusion/spread of technology in an economy over time.

Technological Change Effects on Production

Methods of Production:

• More switch from labour intensive to capital intensive production

• More automation (where production process is controlled by machinery)

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Productivity:

• Increases labour productivity - workers have better technology to work with

• Increases capital productivity - improved machinery

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Costs of Production:

• Average costs of production will fall over time

• Shift DOWNWARDS of AC

Different Types of Innovation (definition, effect on markets, example)

Sustaining = New products or methods are similar or complementary to existing ones.

• → Existing markets are developed (e.g. more competition, cheaper products, more variety)

• e.g. Refrigeration allows more sale of perishable food,

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Disruptive = New products or methods replace or are substitutes for existing ones.

• → Existing markets are destroyed, new markets are developed

• e.g. Video streaming (Netflix) made video rental shops (Blockbuster) obsolete

Technological Change Influence on Market Structures

Makes markets MORE COMPETITIVE:

• Lowers entry costs → lower barriers to entry

  • e.g. Invention of internet enabled e-commerce - retail businesses no longer need to set up physical shop

• Undermines economies of scale - Allows firms to access cost savings regardless of size

  • e.g. Music making - previously had to rent expensive studio sessions to record music, now can just use apps on phone/laptop

• Lower costs of production → Lower fixed costs allow more small firms to survive and more to enter the market → Supply shifts right

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Makes markets LESS COMPETITIVE:

• Large firms may have exclusive access to innovations - they have the capital to purchase these specialised machinery

• → May actually widen barriers to entry

  • e.g. Apple has well-established technical expertise