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 > 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 => 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?

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. Price Supply Equilibrium Equilibrium price $2.00 Demand Equilibrium quantity 0 1 2 3 4 5 6 7 8 9 10 11 12 13 Quantity Equilibrium of Supply and Demand

14. Technology and Change Distinguish between: • Rate of technological change =>growth • 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 => 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?

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 • => importance of trade… • => importance of investment … • => 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 0 700 1,000 Quantity of 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 0 700 750 1,000 Quantity of 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..

30. Translating technological progress into economic growth 1. Invention ~ prototype/basis for patentR 2. Innovation ~ commercial applicationD 3. Diffusion ~ commercialisationD logistic curve. Profitability requires success at each stage – relationship no longer considered linear. Technology does not guarantee local growth

31. 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?

32. 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?

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”!