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?

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 …

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?

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 …

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….

Changes in Quantity Demanded Price D1D $ C A In increase in price results in a movement along the demand curve. Number of Cigarettes Smoked per Day

Change in Demand Price Quantity D1D $2.00 A shift in demand

Quantity Demanded Change in Demand Change in Quantity Demanded versus Change in Demand

Determinants of Supply Market price Input prices Technology (new production methods) Expectations Number of producers

Change in Quantity Supplied versus Change in Supply

Change in Quantity Supplied Price Quantity 0 Supply curve, S As price changes, quantity supplied changes

Increase in Supply Price Quantity 0 Supply curve, S 1

Equilibrium of Supply and Demand Quantity Price $ Equilibrium quantity Equilibrium price Equilibrium Supply Demand

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

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?

How an Increase in Demand Affects the Equilibrium Price Quantity Supply Initial equilibrium D1D1 D2D2

How an Increase in Demand Affects the Equilibrium Price 2.00 $ Quantity Supply New equilibrium Initial equilibrium D1D1 D2D2 Shift in taste towards new product.

How an Increase in Demand Affects the Equilibrium Price 2.00 $ Quantity Supply New equilibrium D1D1 D2D2 resulting in a higher price... Initial equilibrium

How an Increase in Demand Affects the Equilibrium Price 2.00 $ Quantity Supply New equilibrium D1D1 D2D2 resulting in a higher price... Initial equilibrium Further supply 13 Overall effect depends on supply response

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?

How an Increase in Supply Affects the Equilibrium Price Quantity 13 Demand S2S2 10 Initial equilibrium Supply change induced by technology

How an Increase in Supply Affects the Equilibrium Price 2.00 $ Quantity 13 Demand Initial equilibrium New equilibrium S1S1 S2S2 New technology increases the Supply of the product. – depends on amount of competition… 10

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 …

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 ….

3,000 2,000 A Quantity of Cars Produced 70001,000 Quantity of Computers Produced 4,000 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. Two good world

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?

3,000 2,000 A Quantity of Cars Produced ,000 Quantity of Computers Produced 4,000 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

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..

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

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?

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?

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…

ICT Consumers ICT permeates further than many technological changes Industry/ Services

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”!