Technology and the Economy

1
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?

2
Some secrets about economists

• We try to keep things simple, really simple
• Our models are more like physics than biology
  equilibrium gt 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

3
Reflecting on technology

• Micro approach what happens to the individual /
  enterprise as a consequence of a technology
  change gt what happens in the affected market?
• Macro approach what happens in aggregate as a
  consequence of techology change gt what happens
  in related markets? What happens in the economy?

4
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

5
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.

6
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
7
Change in Demand
Price
A shift in demand
2.00
D1
0
10
20
Quantity
8
Change in Quantity Demanded versus Change in
Demand
9
Determinants of Supply

• Market price
• Input prices
• Technology (new production methods)
• Expectations
• Number of producers

10
Change in Quantity Supplied versus Change in
Supply
11
Change in Quantity Supplied
Price
Supply curve, S1
2
As price changes, quantity supplied changes
1.50
2
3
0
Quantity
12
Increase in Supply
Price
Supply curve, S1
0
Quantity
13
Equilibrium of Supply and Demand
14
Technology and Change

• Distinguish between
• Rate of technological change gtgrowth
• Nature of technological change

Process e.g. Scale
Product e.g. Extend range Fill in gaps
Technological Organisational
Goods Services
15
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 gt
  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 gt price fall
• So who benefits? Does anyone lose?

16
How an Increase in Demand Affects the Equilibrium
Price
Supply
2.00
Initial equilibrium
D2
D1
0
7
10
Quantity
17
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
18
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
19
How an Increase in Demand Affects the Equilibrium
Price
Overall effect depends on supply response
Supply
2.50
New equilibrium
Further supply
2.00
resulting in a higher price...
Initial equilibrium
D2
D1
13
0
7
10
Quantity
20
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?

21
How an Increase in Supply Affects the Equilibrium
Price
S2
Supply change induced by technology
Initial equilibrium
Demand
10
0
1
2
3
4
5
6
7
8
9
11
12
13
Quantity
22
How an Increase in Supply Affects the Equilibrium
Price
New technology increases the Supply of the
product. depends on amount of competition
S2
S1
Initial equilibrium
2.50
New equilibrium
2.00
Demand
10
0
1
2
3
4
5
6
7
8
9
11
12
13
Quantity
23
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
• gt importance of trade
• gt importance of investment
• gt importance of confidence

24
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 .

25
Two good world
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.
Quantity of
Computers
Produced
4,000
3,000
2,000
A
Quantity of
700
0
1,000
Cars Produced
26
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?

27
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
Quantity of
Computers
Produced
4,000
3,000
2,000
A
Quantity of
700
750
0
1,000
Cars Produced
28
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..

29
(No Transcript)
30
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

31
Technology and RD

• 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?

32
Role of Government

• Is all market led research pro-competitive?
• Is support for RD within enterprises justified?
• Should market-led research receive public
  funding?
• Could it be anti-competitive (Intel case)?
• Should government be engaged in picking winners?
  

33
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

34
ICT permeates further than many technological
changes
Consumers
Industry/ Services
ICT
35
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!

36
(No Transcript)
37
(No Transcript)
38
(No Transcript)