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Technological Change

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Economics

‘Technology’ is one of the most used words today. This is primarily due to the frequent technological changes we are experiencing in the twenty-first century. Although it is now used more frequently, the concept of technology has been present since the start of human civilization. And the scale of technological change that we are witnessing today is the result of the transmission of knowledge through our history. Technological changes occurred in every century, and the next generations built on that knowledge and expertise.

What is technological change?

The process of technological change starts with invention. Then, the invention goes through innovations where it improves and is used. The process ends with diffusion, where technology is spread across industries and societies.

Technological change refers to the idea of improving existing technologies and developing new ones to improve the existing products and to create new products in the market. This whole process helps in creating new markets and new market structures, and destroying obsolete markets.

One of the terms associated with technological change is ‘technical progress’, which can be analysed through two different lenses.

One is the value-judgment lens, in which we view technical progress as an important factor in increasing economic welfare. For example, setting up new factories can increase the carbon footprint, air pollution, and water pollution, but it can also create new employment opportunities and make decent contributions to the economic sector. If setting up a new factory contributes to economic welfare, people often forget the negative consequences that come with it.

Technological Change Picture of a factory StudySmarterA factory can increase pollution but also create new employment opportunities.

The second lens is not welfare-driven. It views technical progress as simply using scientific and engineering knowledge to produce efficient goods. For example, producing efficient and environmentally friendly cars.

Invention vs innovation in technological change

Invention is attained through scientific progress, whereas innovation is a new step or technique that improves the application of the invention.

Anything which is created entirely new is an invention.

Anything which improves that new creation is innovation.

The computer was a breakthrough invention. Though there were questions on its application, and it could only perform simple calculations, it paved the way for future innovations. The computers of the twenty-first century have the blueprints of that invention but they are better thanks to continuous innovations. Innovation is significant in determining the market leader of a particular product.

Apple, with iPod, was neither an inventor of portable music devices nor it was the first market entrant when it came to providing an online music-sharing platform. Now, it’s one of the giants in the music industry worldwide. Why? Due to the continuous efforts in bringing innovative solutions for its users. They combined convenience, design, and efficiency in a single device.¹

Technological Change iPod StudySmarterOne of the first models of the iPod, Wikimedia Commons.

The effect of technological change on the methods of production

Technological change has impacted the methods of production throughout human history. This change started way back in the stone age and continues today.

The industrial and agricultural revolutions in the eighteenth century were a big turning point. They changed the methods of production in the agricultural and industrial sectors. Efficient ways of farming were introduced such as the application of chemical fertilizers, the use of machinery, and the development of new seeds. As for the industrial revolution, factory production became a common practice. It was heavily energy-dependent. Therefore, factories were moved to areas where the supply of water and coal was guaranteed.

Due to technological progress, steel replaced iron in manufacturing in the nineteenth century. At the time, steel was used for setting up railway infrastructures, which eventually changed the transport system. This revolution was a catalyst for development in the twentieth century.

The effect of technological change is at an all-time high in the twenty-first century. The ‘Computer Age’, which began in the mid-twentieth century, has brought concepts of mechanization and automation into production.

When humans operate machines for production, it is called mechanization, whereas in automation machines are operated by machines.

The effect of technological change on productivity

Productivity is the output produced per unit of input.

The advancement of technology has a substantial effect on productivity. We can achieve better outputs thanks to more efficient systems used in production.

Technology has improved labour productivity as well. One of the metrics used to measure productivity is to calculate the work done by labour per hour. Thanks to technological change, with an efficient system, the per hour output of labour has increased.

The effect of technological change on efficiency

Technological change brings efficiency into production processes and labour performance. There are many types of efficiency; two of the most relevant for us are productive efficiency and dynamic efficiency.

Productive efficiency is the level of output achieved at the average cost of production.

Dynamic efficiency is the formulation of new processes to improve production efficiency in the long run.

The effect of technological change on the costs of production

Improved productivity and efficiency due to technological change, have a positive effect on the cost of production. More productivity means more output per input and more efficiency means that the output is achieved with less cost of production. Hence, the overall cost of production decreases.

The influence of technological change on market structures

Based on different factors in particular markets, technological change can make them monopolistic, competitive, or duopolistic.

A monopolistic market is ruled by one company.

A competitive market isn’t ruled by any company.

A duopolistic market is ruled by two companies.

Kodak, for example, created a monopoly in the chemical film market. It was tough for other companies to break into that market due to entry barriers. On the other hand, due to technological change, it was easier to enter the digital camera market.

Technological Change Kodak film StudySmarterA Kodak film, Wikimedia Commons.

Technological change enabled the American Boeing Corporation and the European Airbus consortium to create a duopoly in jumbo jet manufacturing because it requires huge capital to produce one unit in this market. No other company has the capital to break their duopoly.

Technological change and the destruction of existing markets

Technological change has led to the creation of new markets and the destruction of existing markets. We can explain this through two concepts: disruptive innovation and sustaining innovation.

Innovation is disruptive when it improves existing goods or creates new goods with which the existing market goods can’t compete. Hence, the new market is created, and the existing market is disrupted.

Innovation is sustained when no new markets are created. Companies within the existing markets compete by providing better value than their competitors.

DVD sales lost a major chunk of the USA’s home video market. In 2005, its sales had reached the figure of $16.3 billion which accounted for 64% of the market. Now, with streaming services, DVD has less than 10% of that market share.

Creative destruction

Creative destruction is capitalism evolving and renewing itself over time through new technologies and innovations by replacing older technologies and innovations.

According to famous Austrian-American economist, Joseph Schumpeter, creative destruction must be considered an essential fact of capitalism. New technologies and innovations create new markets, inspire economic structure, and replace old ones. If previous markets didn’t provide economic value and new markets are providing better economic value, then it’s only fair to support this creative destruction. Societies that support this concept grow more productive, attain increased efficiency, and their citizens experience improved living standards.

Technological Change - Key takeaways

  • Technology causes changes in societies.
  • Improving existing technologies and creating new ones are key parts of technological change.
  • A new creation is termed an invention and innovation is the step to make that creation better.
  • From the stone age till the present time, technology has affected the methods of production.
  • Technological change has led to increased productivity and efficiency.
  • The cost of production has decreased over time due to technological change.
  • In many cases, technological change has helped in promoting competition in the market.

Sources

1. Ray Powell and James Powell, Economics 2, 2016.

Technological Change

Automobiles, smartphones, laptops, and wind turbines are some examples of technological changes. 

  1. Research and development (within the industry).
  2. Learning by doing (puting R&D into practice).
  3. Spillover from other industries (direct or indirect knowledge from other industries conducting research and working on related tasks).

The tasks that used to look difficult are now easily achievable due to technological progress. From the abundance of knowledge available at fingertips to machines that ensure more productivity. Technology has made lives easier. 

Invention: creating something new. 
Innovation: finding ways to utilise and improve the inventions. 
Diffusion: the spread of the inventions and innovations in society. 

Final Technological Change Quiz

Question

What is technological change?

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Answer

Technological change is improving existing technologies and developing new ones to improve the existing products and to create new products in the market.

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What is an invention? 

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Anything that is created for the first time. 

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Which century is considered the ‘Computer age’?

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Answer

Mid twentieth century onwards. 

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What does productivity mean?

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It is the output produced per unit of input.

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What is a monopolistic market structure?

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Answer

A market ruled by one company. 


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What is disruptive innovation?

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Innovation is disruptive when it improves existing goods or creates new goods with which the existing market goods can not compete.

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What does sustaining innovation mean? 

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Due to sustained innovation, no new markets are created. Companies within the existing markets compete by providing better value than their competitors. 

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What is the definition of creative destruction?

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Answer

Capitalism evolving and renewing itself over time through new technologies and innovations by replacing older technologies and innovations. 

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When did the agricultural and industrial revolutions begin? 

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Answer

 In the eighteenth century. 

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In which century did steel replace iron in infrastructure development and manufacturing?

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Answer

In the nineteenth century. 

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What does the cost of production mean?

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A cost that is incurred while producing a unit of a good. 

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What is innovation?

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Anything that improves an invention is called innovation. 

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What is a duopolistic market structure?

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A market ruled by two companies. 

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What is a competitive market structure?

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A market where not one or two companies are ruling it. Every company has equal chance of progressing. 

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Who came up with the term ‘creative destruction’? 

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An Austrian American economist named Joseph Schumpeter. 

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Anything which is created entirely new is an 

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invention

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Innovation is 

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anything which improves a new creation.

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How has technology helped productivity?

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Answer

One of the metrics used to measure productivity is to calculate the work done by labour per hour. Thanks to technological change, with an efficient system, the per hour output of labour has increased.  

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When humans operate machines for production, it is called __________.

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mechanization

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Machines operated by machines is known as _______.

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automation

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Why were factories were moved to areas where the supply of water and coal was guaranteed in the eighteenth century?

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Answer

Factory production had become a common practice and was heavily energy-dependent. Therefore, factories were moved to areas where the supply of water and coal was guaranteed.  

Show question

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What are the two types of efficiency?

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Answer

Productive efficiency and dynamic efficiency. 

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Productive efficiency is the 

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level of output achieved at the average cost of production.  

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__________ is the formulation of new processes to improve production efficiency in the long run. 

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Dynamic efficiency

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A monopolistic market 

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is ruled by one company.  

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A competitive market  

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isn’t ruled by any company.  

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A ____________ is ruled by two companies.  

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duopolistic market

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What is creative destruction?

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Answer

Creative destruction is capitalism evolving and renewing itself over time through new technologies and innovations by replacing older technologies and innovations.  

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Innovation is disruptive when it improves existing goods or creates new goods with which the existing market goods can’t compete. 

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Answer

True

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Question

More _________ means more output per input and more _________ means that the output is achieved with less cost of production. 

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Answer

productivity, efficiency

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