1. Chapter 15 Technological Change
McGraw-Hill/Irwin
Copyright © 2012 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Learning Objectives
Explain the importance of technological change, including the information revolution.
List three types of innovation.
Explain the link between innovation and innovative activities.
Identify and discuss the factors that affect the supply curves for innovative activities.
Identify and discuss the factors that affect the demand curves for innovative activities.
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3. Nature of Technological Change
Technological change is the introduction into the market of new goods and services, or new processes of production, that did not exist before.
Technological change pushes out the limits of what we can produce, given today’s natural resources and workforce.
It is responsible for the large increases we have obtained in living standards.
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4. Information Revolution
Technology changes are not steady, but occur in waves.
The information revolution occurred when computers became powerful enough to make a difference in the economy.
It was driven by advances in electronics as electronic devices became smaller, more powerful, and cheaper.
Moore’s law says that microprocessors double their performance every months.
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5. Types of Innovation
A productivity-enhancing innovation is one that enables the industry to produce more of the product, while holding fixed the resources used.
This has the effect of shifting the supply curve to the right.
Businesses will typically reduce the market price and increase the quantity sold in the market.
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6. Types of Innovation
A second type of innovation results in the creation of new products and services.
The creation of new goods and services enables people to do things that they could not do before and results in a major change in people’s lives.
Examples of new product innovation include television, cell phones, and the Internet.
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7. Types of Innovation
A quality-of-life innovation enhances the quality of life for you and those around you.
The best example is an improvement in healthcare technology.
Technological advances that reduce pollution also fall into the category of a quality-of-life innovation.
A quality-of-life innovation generates positive externalities or reduces negative externalities.
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8. Innovative Activities
Innovative activities are those economic activities primarily directed to creating and developing new ideas, new knowledge, and new technology.
The main measure of the amount of innovative activities going on in an economy is the level of spending for research and development (R&D).
R&D represents money and resources directed to advancing knowledge in science and technology.
It can be undertaken by corporations, by the government, or by academic institutions.
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9. Spending on Research and Development, 2008 (Billions of Dollars)
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10. Market for Innovative Activities
Look at the supply and demand for innovative activities:
The supply curve for innovative activities tells us the quantity of innovative activities supplied, given their price.
The demand curve for innovative activities tells us the quantity of innovative activities demanded, given their price.
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11. Supply and Demand for Innovative Activities
Price of innovative activities
Supply curve for innovative activities P
Demand curve for innovative activities Q
Quantity of innovative activities supplied and demanded
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12. Innovation: The Supply Side
Look at the factors that cause the supply curve for innovation to shift:
The first factor is the availability of scientists and engineers.
The U.S. faces a shortage of scientists and engineers.
As a result, there has been more immigration of skilled scientists and engineers.
There is ongoing debate about whether or not this is good for the U.S.
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13. Impact of Immigration on Innovation
Supply curve for native-born scientists and engineers
Wages for scientists and engineers
Supply curve for scientists and engineers, including immigrants W W1
Demand curve for scientists and engineers E E1
Employed scientists and engineers
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14. Innovation: The Supply Side
A second factor impacting the supply curve for innovation is the availability of venture capital.
Venture capital funds raise money to invest in high-risk technology start-up companies.
Most of the companies they invest in will not be successful.
However, investments in the successful firms result in huge profits which more than offset the losses.
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15. Innovation Clusters
The chances of innovations occurring seem to improve when innovative companies are clustered together.
There’s a pool of skilled and experienced labor which moves from company to company.
And there are sources of financial support, like the nearby venture capital firms.
An excellent example of an innovation cluster is Silicon Valley, where companies such as Intel, Google, and Yahoo were started.
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16. Innovation Clusters
Other technology clusters include Cambridge, MA, which has become the world center for biotech, and Bangalore, India.
An innovation cluster is a region in which the supply curve for innovative activities is shifted to the right.
Once innovative clusters develop, they tend to persist even through periods of economic difficulty.
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17. Innovation: The Demand Side
Look at the factors that cause the demand curve for innovation to shift:
The first factor is the profitability of R&D spending.
Most studies show that the profitability of R&D spending is very high.
But the risk involved in investing in R&D is also very high.
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18. Innovation: The Demand Side
Companies are also reluctant to invest in R&D because the company that pays for the research may not get all or even most of the benefits.
The private return to innovation is the gain to the original company funding the research, while the social return to innovation is the benefit to the whole economy.
In general, the social return will be much greater than the private return.
Xerox is a classic example of a company that came up with great ideas, but reaped very little benefit from them.
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19. Innovation: The Demand Side
Another factor impacting the demand for innovation is patent and intellectual protection.
This protects the innovation from being copied and enables the company to make a profit.
A patent allows an inventor to control the use of his or her innovation for a set period of time, currently 20 years.
Patents allow an inventor to profit from the innovation, but also encourage the inventor to share the idea with the rest of society.
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20. Innovation: The Demand Side
The final factor determining the demand for innovation is competition.
An innovation that allows for the sale of a better product at a lower cost will enable the company to have success in the marketplace.
Thus, competition forces companies to innovate in order to be successful.
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21. Diffusion of New Technology
Technological diffusion is the process by which new ideas spread from the original company to other businesses in the economy.
These new ideas can be used by others unless they have patent protection.
In general, the process of diffusion of new technologies tends to be gradual and slow.
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