Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

McGraw-Hill/Irwin

Chapter 15Chapter 15Chapter 15Chapter 15

Technological Change

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Chapter ObjectivesChapter ObjectivesChapter ObjectivesChapter Objectives

• Nature of technological change

• Information revolution

• Types of innovation

• Innovative activities

• Innovation: supply and demand sides

• Diffusion of new technologies

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Nature of Technological ChangeNature of Technological ChangeNature of Technological ChangeNature 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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Information RevolutionInformation RevolutionInformation RevolutionInformation 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 18-24 months.

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Types of InnovationTypes of InnovationTypes of InnovationTypes of Innovation

• A productivity-enhancing innovation is one that enables the industry to produce more of the product, but holding the resources used fixed. – This has the effect of shifting the supply curve

to the right. – Business will typically reduce the market price

and increase the quantity sold in the market.

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Types of InnovationTypes of InnovationTypes of InnovationTypes 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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Types of InnovationTypes of InnovationTypes of InnovationTypes 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 health

care 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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Innovative ActivitiesInnovative ActivitiesInnovative ActivitiesInnovative 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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Spending on Research and DevelopmentSpending on Research and DevelopmentSpending on Research and DevelopmentSpending on Research and Development

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Market for Innovative ActivitiesMarket for Innovative ActivitiesMarket for Innovative ActivitiesMarket 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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Supply and Demand for Innovative Supply and Demand for Innovative ActivitiesActivities

Supply and Demand for Innovative Supply and Demand for Innovative ActivitiesActivities

Demand curve for innovative activities

Price of innovative activities

Quantity of innovative activities supplied and demanded

Supply curve for innovative activities

P

Q

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Innovation: The Supply SideInnovation: The Supply SideInnovation: The Supply SideInnovation: 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 US.

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Impact of Immigration on InnovationImpact of Immigration on InnovationImpact of Immigration on InnovationImpact of Immigration on Innovation

Demand curve for scientists and engineers

E1

W1

Supply curve for scientists and engineers, including immigrants

Wages for scientists and engineers

E

Employed scientists and engineers

Supply curve for native-born scientists and engineers

W

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Innovation: The Supply SideInnovation: The Supply SideInnovation: The Supply SideInnovation: 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 that more than offset the losses.

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Innovation ClustersInnovation ClustersInnovation ClustersInnovation 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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Innovation ClustersInnovation ClustersInnovation ClustersInnovation 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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Innovation: The Demand SideInnovation: The Demand SideInnovation: The Demand SideInnovation: 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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Innovation: The Demand SideInnovation: The Demand SideInnovation: The Demand SideInnovation: 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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Innovation: The Demand SideInnovation: The Demand SideInnovation: The Demand SideInnovation: 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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Innovation: The Demand SideInnovation: The Demand SideInnovation: The Demand SideInnovation: 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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Diffusion of New TechnologyDiffusion of New TechnologyDiffusion of New TechnologyDiffusion 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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The Slow Adoption of Tractors on The Slow Adoption of Tractors on FarmsFarms

The Slow Adoption of Tractors on The Slow Adoption of Tractors on FarmsFarms