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
Price
Demand

Supply

Equilibrium price Equilibrium

$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 Product
e.g. Scale e.g. Extend range
Technological & Fill in gaps
Organisational 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
Price
Affects the Equilibrium

Supply

2.00
Initial
equilibrium
D2

D1

0 7 10 Quantity
How an Increase in Demand
Price
Affects the Equilibrium
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
Price
Affects the Equilibrium

Supply

$2.50 New equilibrium

2.00
resulting
in a higher Initial
price... equilibrium
D2

D1

0 7 10 Quantity
 How an Increase in Demand
Price
Affects the Equilibrium
Overall effect depends
on supply response
Supply

$2.50 New equilibrium

Further
2.00
resulting supply
in a higher Initial
price... equilibrium
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
New technology increases the
Supply of the product. – depends
S2 on amount of competition…
S1

Initial
$2.50 equilibrium

2.00 New equilibrium

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
A world with just two goods:
Quantity of
If we look at production
Computers
Produced
of both computers and cars,
4,000
the concave line joining X
and Y shows the maximum
3,000 combinations of two goods
that can be produced.
2,000
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?
 Growth: Improvement in
Quantity of technology for producing
Computers
Produced computers means that more
4,000
of one or both products can
be produced. Change means
that more computers can be
3,000
produced relative to cars

2,000
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 1975-1980 1980-1985 1985-1990 1990-1995 1995-2000

Irish GNP Growth EU15 GDP Growth Irish GNP 1970-200 Average 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 Consumers
technological
changes 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”!