Technology and the Economy
• How do economists think about
technology?
• Why has technology become relatively
more important?
• In what sense are developments in
information technology different from other
technologies?
Some secrets about economists…
• We try to keep things simple, really simple
• Our models are more like physics than
biology … equilibrium > evolution
• We like the number “2” – minimum to deal
with the concept of “relativity”
• We tend to concentrate on what we
understand and what fits into our models
• For many decades we ignored technology
and growth more than we should have …
Reflecting on technology
• Micro approach – what happens to the
individual / enterprise as a consequence of a
technology change => what happens in the
affected market?
• Macro approach – what happens in
aggregate as a consequence of techology
change => what happens in related
markets? What happens in the economy?
Micro approach
• What happens in markets?
• What happens to consumers – the demand
side of the story?
• What happens to producers – the supply
side of the story?
• Let me introduce you to a little economics
…
Determinants of Demand
•
•
•
•
•
•
Market price
Consumer income
Prices of related goods
Tastes (new products)
Expectations
Number of consumers
Look at the relationship between the quantity
demanded and each of the determinants in turn –
separately – price quantity relationship is the
demand curve….
Changes in Quantity Demanded
Price
In increase in price results in a movement
along the demand curve.
C
$4.00
A
2.00
D1
0
12
20
Number of Cigarettes
Smoked per Day
Change in Demand
Price
A shift in demand
$2.00
D1
0
10
20
Quantity
Change in Quantity Demanded versus
Change in Demand
Variables that
Affect Quantity Demanded
A Change in This Variable . . .
Price
Represents a movement along
the demand curve
Income
Shifts the demand curve
Prices of related goods
Shifts the demand curve
Tastes (new products)
Shifts the demand curve
Expectations
Shifts the demand curve
Number of buyers
Shifts the demand curve
Determinants of Supply
•
•
•
•
•
Market price
Input prices
Technology (new production methods)
Expectations
Number of producers
Change in Quantity Supplied versus
Change in Supply
Variables that
Affect Quantity Supplied
A Change in This Variable . . .
Price
Represents a movement along
the supply curve
Input prices
Shifts the supply curve
Technology
Shifts the supply curve
Expectations
Shifts the supply curve
Number of sellers
Shifts the supply curve
Change in Quantity Supplied
Price
Supply
curve, S1
2
As price changes,
quantity supplied
changes
1.50
0
2
3
Quantity
Increase in Supply
Price
Supply
curve, S1
0
Quantity
Equilibrium of Supply and
Demand
Price
Supply
Equilibrium
Equilibrium price
$2.00
Demand
Equilibrium
quantity
0
1
2
3 4
5 6
7
8 9 10 11 12 13
Quantity
Technology and Change
Distinguish between:
• Rate of technological change =>growth
• Nature of technological change
Process
e.g. Scale
Technological &
Organisational
Product
e.g. Extend range
Fill in gaps
Goods & Services
How does technology change
affect the market?
• Product change – new consumers emerge
(shift from other products) bidding up price
which, without competition, induces relatively
little entry => little reduction in price
• So who benefits? Does anyone lose?
• Product change – new consumers emerge
(shift from other products) bidding up price
which, with competition, induces more supply
=> price fall
• So who benefits? Does anyone lose?
How an Increase in Demand
Affects
the
Equilibrium
Price
Supply
2.00
Initial
equilibrium
D2
D1
0
7
10
Quantity
How an Increase in Demand
Affects
the
Equilibrium
Price
Shift in taste towards new product.
Supply
$2.50
New equilibrium
2.00
Initial
equilibrium
D2
D1
0
7
10
Quantity
How an Increase in Demand
Affects
the
Equilibrium
Price
Supply
$2.50
New equilibrium
2.00
resulting
in a higher
price...
Initial
equilibrium
D2
D1
0
7
10
Quantity
How an Increase in Demand
Affects
the
Equilibrium
Price
Overall effect depends
on supply response
Supply
$2.50
New equilibrium
2.00
resulting
in a higher
price...
Initial
equilibrium
Further
supply
D2
D1
0
7
10
13
Quantity
How does technology change
affect the market?
• Process change – without competition,
some more will be produced but controlled
by those with “market power”
• So who benefits? Does anyone lose?
• Process change – with competition, more
can be produced which causes supply to
shift which causes price to fall …..
• So who benefits? Does anyone lose?
How an Increase in Supply
Affects the Equilibrium
Price
S2
Supply change
induced by technology
Initial equilibrium
Demand
0
1
2
3
4
5
6
7
8 9 10 11 12 13
Quantity
How an Increase in Supply
Affects the Equilibrium
Price
S2
New technology increases the
Supply of the product. – depends
on amount of competition…
S1
Initial
equilibrium
$2.50
New equilibrium
2.00
Demand
0
1
2
3
4
5
6
7
8 9 10 11 12 13
Quantity
Impact of Technology on Markets
Benefits depend on
• Extent of the technology change
• Nature of the market system
• Ability of consumers to respond
• Ability of producers to respond
• => importance of trade…
• => importance of investment …
• => importance of confidence …
How do economists think about
technology
• Short run: technology and techniques of
production are pretty fixed
• Medium run: technology is fixed but it is possible
to alter the techniques of production significantly
• Long run: technology can change, affecting how
production is undertaken and what is produced.
• ICT: Distinction has narrowed …
• Even the simplest technology change affects the rest
of the economy ….
Two good world
Quantity of
Computers
Produced
4,000
3,000
2,000
A world with just two goods:
If we look at production
of both computers and cars,
the concave line joining X
and Y shows the maximum
combinations of two goods
that can be produced.
A
0
700
1,000
Quantity of
Cars Produced
Consider a technology change
• Technology change could occur in one or
other sector or both..
• Focus on one – say computers – so that a
33.3% increase in output results
• Suppose that instead of 3,000 units, 4,000
could be produced ..
• What would happen?
Quantity of
Computers
Produced
4,000
3,000
2,000
Growth: Improvement in
technology for producing
computers means that more
of one or both products can
be produced. Change means
that more computers can be
produced relative to cars
A
0
700 750
1,000
Quantity of
Cars Produced
Implications
• Technology indirectly affects the whole
economy
• The extent of the impact depends on how
important the sector is in the economy
• This helps explain why Irish growth has
been so phenomenal in recent years..
Irish and EU Growth Rates 1970-2000
9
9
8
8
7
7
6
6
5
5
4
4
3
3
2
2
1
1
0
0
1970-1975
Irish GNP Growth
1975-1980
1980-1985
EU15 GDP Growth
1985-1990
Irish GNP 1970-200 Average
1990-1995
1995-2000
EU15 GDP 1970-2000 Growth
Translating technological
progress into economic growth
1.Invention
~
prototype/basis for
patent R
2.Innovation
~
commercial application D
3.Diffusion
~
commercialisation D
logistic curve.
Profitability requires success at each stage –
relationship no longer considered linear.
Technology does not guarantee local growth
Technology and R&D
• If technological change is important for
growth and development, how do we make
sure that it happens?
• How do we make sure it diffuses?
• Idea that governments have a direct role in
the process – role of the “arms race”…
• EU context – Lisbon strategy: US vs EU
• What is the role for government?
Role of Government
• Is all market led research pro-competitive?
• Is support for R&D within enterprises
justified?
• Should market-led research receive public
funding?
• Could it be anti-competitive (Intel case)?
• Should government be engaged in picking
winners?
Role of Government
Foster basic research as “global public good”
– link between innovation and growth
– will individual country necessarily benefit?
– need for national system of innovation (NSI)
if individual country to benefit?
– Issue of patents - possible at pre-competitive
level?
“Ideal Patent”
long enough/short enough?
Big issue for software patents…
ICT
permeates
further than
many
technological
changes
Consumers
Industry/
Services
ICT
Economists see technology as
•
•
•
•
Source of output growth potential
Source of living standard improvements
Source of economic restructuring
Source of income distribution changes
• Its actual impact depends on the economic
environment in which it occurs!
• Importance of the “dismal science”!