Firms & Technological
Change
A2 Economics
Aims and Objectives
Aim:
• Understand how technological change affects firms objectives.
Objectives:
• Define invention & innovation.
• Explain how the firm will be affected by technological progress.
• Analyse the effects of technological change on firm costs.
• Evaluate the effects on consumer surplus from technological
change.
Starter
How might technological progress affect the
following:
• Output
• Quality
• Goods & Services
Technological Progress
• More output can be produced with the
same inputs.
• Existing outputs undergo an improvement
in quality.
• Completely new goods and services
become available.
Invention & Innovation
Invention
• Thinking of a completely
new idea that can be
patented and protected.
Innovation
• The putting of an
invention into commercial
use.
Firms that are able to innovate can lower their costs to
come up with new products, new processes, new
techniques. This is dynamic efficiency.
Product Life Cycle
Task:
Explain why
both invention
and innovation
are likely to
shorten
product life
cycles.
Effect of Innovation on Firm’s
Costs
Unit
Back to Back
Whiteboard Task
Cost
SRATC
B
LRATC OLD
PLANTS
SRATC1
C
LRATC NEW
PLANTS
A
Output
Diagram Explained
• Firm is experiencing
increasing returns to
scale.
• Output 0A, Cost 0B.
• New technological
advance.
• Lowers the LRATC
curve.
• Unit cost saving of
BC.
• New plants can earn
higher profits.
• Shift industry S curve
to right and P will fall.
• Firms that don’t invest
in new plants will find
it difficult to compete.
SPEED DATING: DIAGRAM & EXPLANATION
Constant Change
• Electronic firms face constant
technological change.
• These products have short life-cycles.
iPhone 3GS
iPhone 4
Why does price fall over time?
Why does price fall over time?
• Very short product life cycles.
• Firms try to re-coup as much of their investment
costs as rapidly as possible before comp.adv. is
eroded away and prices fall.
• Initial demand is inelastic.
• Demand that follows after initial sales is more
price elastic.
Plenary
1) Construct a diagram to show the effect of
innovation on firms.
2) Explain why both innovation and
invention are likely to shorten product life
cycles.
3) What is the likely effect on the consumer
surplus of innovation over time?