Technological Change

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.

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.

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.

The effect of technological change on productivity

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.

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.

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.

Kodak monopoly

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.

Creative destruction

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.

Sources

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