Technological change is the development and application of new or improved technologies that can alter how goods and services are produced, distributed and consumed. It can affect productivity, costs, productive capacity, products, markets and competition. Understanding technological change is important for A-Level Economics students because it can change the efficiency of firms, influence market structures and create both opportunities and challenges for existing businesses.
This topic can be found in:
- AQA A-Level Economics | Component 1: Individuals, Firms, Markets and Market Failure | Topic 4: Production, Costs and Revenue
Definitions
- Technological change: The development and application of new or improved technologies.
- Invention: The creation of a new product, process or technology.
- Innovation: The successful application, development or commercialisation of new ideas, inventions or technologies.
- Productivity: The amount of output produced from a given quantity of inputs.
- Automation: The use of technology and machinery to perform tasks that may previously have been carried out by workers.
Key Features
Technological Change and Production
Technological change can increase productivity by allowing firms to produce more output from the same quantity of inputs. It can improve productive efficiency, reduce average costs and increase a firm's productive capacity. Technology can also change the combination of factors of production used by a firm. For example, automation may allow a firm to substitute capital for labour, while other technologies may complement workers and allow them to become more productive.
Technological Change and Products and Markets
Technological change can create new products and markets while also making existing products, production methods or firms obsolete. Improvements in technology may increase demand for new products or allow firms to enter markets that did not previously exist. However, technological change can also cause existing markets to decline or disappear. Firms that successfully adopt new technologies may gain market share if they can reduce costs or offer more attractive products.
Technological Change and Competition
Technological change can affect the level of competition within a market by changing barriers to entry and the relative power of firms. Patents, specialist knowledge and large research budgets can create barriers to entry, making it harder for new firms to compete. However, widely available technologies, online selling and digital platforms can reduce barriers to entry. If new technology gives large firms significant cost advantages, market concentration may increase as smaller firms struggle to compete.
Evaluation
Advantages
- Higher Productivity: Technological change can allow firms to produce more output from the same inputs, increasing productivity and productive efficiency.
- Lower Average Costs: More efficient production methods can reduce the average cost of producing goods and services, potentially improving a firm's competitiveness.
- New Products and Markets: Technological change can create new products, services and markets, providing opportunities for firms to expand and increase demand.
Disadvantages
- Worker Displacement: Automation and other technologies can replace some tasks previously performed by workers, potentially reducing demand for certain types of labour.
- Existing Firms Can Become Obsolete: Firms that fail to adopt new technologies may become less competitive as products, production methods or markets change.
- Changes to Competition: Technology can create barriers to entry through patents, specialist knowledge and research costs, potentially increasing market concentration and the relative power of larger firms.
Summary
- Technological change involves the development and application of new or improved technologies.
- Invention creates something new, while innovation involves the successful application or commercialisation of new ideas.
- Technology can increase productivity, reduce average costs and improve productive efficiency.
- Technological change can create new products and markets while making existing products and firms obsolete.
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Technology can increase or reduce barriers to entry, changing competition, market concentration and the relative power of firms.
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