Technological change represents innovation that can reduce the cost of production or bring new products on line. As stated earlier, the very long run is a period that is sufficiently long for new technology to evolve and be implemented.
Technological change represents innovation that
can reduce the cost of production or bring new products on line.
Technological change has had an enormous impact on economic life for several centuries. It is not something that is defined in terms of the recent telecommunications revolution. The industrial revolution began in eighteenth century Britain. It was accompanied by a less well-recognized, but equally important, agricultural revolution. The improvement in cultivation technology, and ensuing higher yields, freed up enough labour to populate the factories that were the core of the industrial revolution 1 . The development and spread of mechanical power dominated the nineteenth century, and the mass production line of Henry Ford heralded in the twentieth century. The modern communications revolution has reduced costs, just like its predecessors. But it has also greatly sped up globalization, the increasing integration of national markets.
Globalization is the tendency for international
markets to be ever more integrated.
Globalization has several drivers, the most important of which are lower transportation and communication costs, reduced barriers to trade and capital mobility, and the spread of new technologies that facilitate cost and quality control. New technology and better communications have been critical in both increasing the minimum efficient scale of operation and reducing diseconomies of scale; they facilitate the efficient management of large companies.
The continued reduction in trade barriers in the post-World War II era has also meant that the effective marketplace has become the globe rather than the national economy for many products. Companies like Apple, Microsoft, Nokia, and Dell are visible worldwide. Globalization has been accompanied by the collapse of the Soviet Union, the adoption of an outward looking philosophy on the part of China, and an increasing role for the market place in India. These developments together have facilitated the outsourcing of much of the West’s manufacturing to lower wage economies.
But new technology not only helps existing companies grow large; it also enables new ones to start up. It is now cheaper for small producers to manage their inventories and maintain contact with their own suppliers. Contrary to what is often claimed, new technology has not led to a greater concentration of the economy’s output in the hands of a small number of big producers; the competitive forces that the new technology has unleashed are too strong.
The impact of technology on our cost curves is illustrated in Figure 8.7. It both reduces the whole cost structure of production, and at the same time increases the minimum efficient scale.
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