Firms & Technological Change

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Presentation transcript:

Firms & Technological Change A2 Economics

Aims and Objectives Aim: Understand how technological change affects firms objectives. Objectives: Define invention & innovation. Explain how the firm will be affected by technological progress. Analyse the effects of technological change on firm costs. Evaluate the effects on consumer surplus from technological change.

Starter How might technological progress affect the following: Output Quality Goods & Services

Technological Progress More output can be produced with the same inputs. Existing outputs undergo an improvement in quality. Completely new goods and services become available.

Invention & Innovation Thinking of a completely new idea that can be patented and protected. The putting of an invention into commercial use. Firms that are able to innovate can lower their costs to come up with new products, new processes, new techniques. This is dynamic efficiency.

Product Life Cycle Task: Explain why both invention and innovation are likely to shorten product life cycles.

Effect of Innovation on Firm’s Costs Back to Back Whiteboard Task Unit Cost SRATC B LRATC OLD PLANTS SRATC1 C LRATC NEW PLANTS A Output

SPEED DATING: DIAGRAM & EXPLANATION Diagram Explained Firm is experiencing increasing returns to scale. Output 0A, Cost 0B. New technological advance. Lowers the LRATC curve. Unit cost saving of BC. New plants can earn higher profits. Shift industry S curve to right and P will fall. Firms that don’t invest in new plants will find it difficult to compete. SPEED DATING: DIAGRAM & EXPLANATION

Constant Change Electronic firms face constant technological change. These products have short life-cycles. iPhone 3GS iPhone 4

Why does price fall over time?

Why does price fall over time? Very short product life cycles. Firms try to re-coup as much of their investment costs as rapidly as possible before comp.adv. is eroded away and prices fall. Initial demand is inelastic. Demand that follows after initial sales is more price elastic.

Plenary Construct a diagram to show the effect of innovation on firms. Explain why both innovation and invention are likely to shorten product life cycles. What is the likely effect on the consumer surplus of innovation over time?