Technological advantage and efficiency

      Technological advance contributes enormously to economics efficiency. New and better products and processes enable the society to produce more goods at a less price, and produce a higher-valued mix of output.

 Productive efficiency
       Technological advance improves productive efficiency by increasing the productivity of inputs and by reducing the average total costs. In enables society to produce the same amount of goods and services by using fewer resources, so that it frees unused resources and produce something else from them. If society needs now more less-expensive goods, process of innovation helps to gain greater quantity of output by sacrifying fewer resources used as input. We may state that process innovation increase productive efficiency: it reduces society’s cost of whatever mix of goods and services it wants and thus it is an important factor that shifts economy’s production possibilities curve by shifting it rightwards.
Allocative efficiency
   Technological advance used at production process of various goods increase the allocative efficiency by giving society more desired mix of goods and services.  Consumers are willing to buy a new product rather than an older one only if the new one increases the total utility obtained from usage of the same quantity of scarce resources. That’s obviously that new product (and new mix of products) will create a higher total utility for society. That’s why demand for old product declines and demand for the new one increases. High economic profit gained from the new product attracts resources away from less-wanted by society uses to the production of new item.  This shifting of resources continues until marginal cost and marginal benefit equalize each other.
   However, innovation (either of product or price) may create a monopoly power in the market through patents and through other advantages of being first. When a new monopoly power results from an innovation, society may lose a part of its efficiency it otherwise would have gained from this innovation.  The reason is that monopolist may keep product’s price above marginal cost.
   Innovation may reduce or even destroy monopoly power by providing competition somewhere it didn’t previously exist. Economic efficiency is enhance after this event occurs, because this new product helps to push the prices down, close to marginal cost and minimum average total costs (ATV). Innovation that leads to greater competition in an industry reduces output-restrictions and monopoly prices.

Creative Destruction
   Innovation may even generate a creative destruction, in which creation of new products and production methods simultaneously destroys the market position of existing monopolies and old ways of doing business.
   Examples of creative destructions: movies brought new competition to theatres, which can be shown one at a time, but movies latter were challenged by television, aluminum cans and plastic bottles also displaced glass bottles in many uses, e-mail has challenged the postal service.
   Schumpeter says that an innovator will displace any monopolist that no longer delivers superior performance, but this idea is most treated as a wishful thinking nowadays. In this view, idea that creative destruction is automatic, but it neglects somehow the ability of well-established firms to provide shelter by themselves or by lobbying government to do it. This idea ignores differences between legal freedom of entry and economic reality of entering potential newcomers to concentrated industries.
   In this case dominant firm(s) may use strategies as buyouts, selective price-cutting, massive advertising to block the entry and competition from existing rivals and appearing innovative firms. Moreover, some firms may be able to persuade government to give them subsidies, tax-break, tariff-protection to strengthen their market power.
   In conclusion, while innovation increases economic efficiency; in some cases it may lead to expanding of monopoly power. Moreover, innovation may destroy monopoly power, but this process is neither automatic nor inevitable. However, technological change, innovation and efficiency doesn’t always bring monopoly power.

Role of Entrepreneurs and Innovators

       Entrepreneurs: Entrepreneur is an innovator, initiator and a risk bearer- an element that combines labor, land and capital resources in new and original way so that this business may produce new goods and services. In past a single individual carried out all entrepreneur functions in a firm, but nowadays because of more technological complex economy, entrepreneurship is more likely to be carried out by entrepreneurial teams. Such teams may include two or three people working as their own bosses or developing new ideas, or this team may also consist of a larger number of entrepreneurs who are administrated their own financial resources.
   Other innovators In the process of producing are included other people who don’t bear personal financial risk. They may be scientists, key executives, or other employees engaged in Research and Development activities (R&D). (They are sometimes called intrapreneurs)
Start-Ups
   Sometimes entrepreneurs form some small companies called start-ups, these firms focus of developing and introducing new products or on creating a new production or distribution technique. An example from history, was when two people working in their garages, formed such a start-up in 1970s. After some time they have founded their own company: Apple Computers.
Innovating existing firms
   Innovators also work in already existing corporations, whether these are large or small. In this case innovators are salaried workers which are paid very well and get substantial bonuses and shares of the profit. R&D work in large corporations has produced very important technological advances in different production systems.
    However, some large firms have split their R&D and manufacturing part of firm and have formed new, more innovative firms.
Anticipating Future
   It’s extremely difficult to anticipate the future but that’s what innovators are trying to do. These people who have strong anticipation abilities and are highly-determined may be able to introduce new and improved products at the right time. If they do so, the rewards may very big, monetary and nonmonetary ones. In order to develop a product one should be very creative and rewards for his success may be some intangible rewards like personal satisfaction. Winners of this competition of innovations can reap huge monetary rewards in for of economic profits, stock appreciation and very big bonuses. An example can be Paul Allen and Bill Gates who founded Microsoft in 1970s and received by 2000 approximately 60 billion of dollars.
   Past success offer innovators and entrepreneurs access to further innovations that may anticipate buyers’ wants. Even if they may not succeed the second time, a try is also important. Market doesn’t care if the entrepreneurs and innovators are Canadian, Americans, Japanese, Chinese or Swiss. Main scope is innovation and better society.
Government and University Scientific Research
   Very small amount of money from R&D is spent on scientific research, because scientific principles can’t be patented and they don’t have immediate commercial uses. However, scientific knowledge is very important for technological advance. That’s why entrepreneurs try to find out the output of universities and government labs’ researches.
   Government and university labs have been the place where a lot of amazing technological inventions have been discovered. Computers and biotechnology are some results of experiments made there. That’s why firms tend to invest in university researches that are related to their products. Business founding of R&D at university has grow rapidly. Today scientists and universities understand that their work may have some commercial value, that’s why they are teaming up with innovators and share possible profits. However, some firms find it more profitable to make researches on their own. This is more common in pharmaceutical and computer industry where it’s uncommon to distribute new scientific knowledge generated in their labs.

Technological advance: invention, innovation, and diffusion.

       In economics technological advantage is new and better goods and services and new and better ways of producing or spreading them. This process occurs over a theoretical time called very long run, than can be as short as few weeks or as long as many years. Let’s recall that in all our market systems (pure competition, monopolistic competition, oligopoly and pure monopoly), the short run is a period in which technology, plant are fixed, however in the long run , technology is constant but the firms can change their plant size and are free to enter and exit the industry. In contrast, very long run is a period in which technology can change and firm can develop and supply totally new products.
   It’s known that technological advantage shifts product possibility curve upward, enabling economy to achieve more goods and more services. Technological advantage can be is made up of three parts: invention, innovation, and diffusion.
 Invention
   The first step to technological advantage is invention: the discovery of product or process of producing by using imagination, thinking and experimenting. Invention is a process and the result of it is also called invention. Invention is based in scientific knowledge and it is the result of work of individuals who work on their own or as members of Research and Development (R&D) departments in firms. Government encourages invention by providing patents, right to sell any innovative process of production, machines or products in a set time.
Innovation
Innovation is directly related to invention. While invention is “discovery and proof of workability”, innovation is the successful introduction of new product (invention) in the market, the first use of a new method of producing, or the creation of new form of business firm. There are two types of innovation: product innovation, improving products and services, and process innovation, which is improved ways of production and spreading of these inventions in the market.
In contrast to invention, innovations cannot be patented. Innovation needs not to weaken or destroy the existing firms. Because new products and processes threaten firms’ survival, existing firms have a high incentive to engage into research and development (R&D) process continuously. These innovative products and processes enable firm to earn higher revenue or to maintain the present ones. Innovation can strengthen or weaken market power.
 Diffusion
   Diffusion is the process of spreading of inventions through imitating or copying. To take the advantage of new profits or to slow down disappearing of others, all firms try to implement the innovations. In most of the cases innovation leads to widespread imitation (that’s diffusion) of inventions. For example, soon after McDonald’s introduced the fast-food hamburger, Burger Kings also started to produce it, since it offered high revenues for the firms that supplied this good.
Research and Development (R&D) Expenditures
When it’s related to business research and development means the efforts towards inventions, innovations and diffusion. Many countries engage in R&D of national defense, so that annually they spend thousands of billions of dollars.
Importance of Technological Advantage
   Technological advances for many centuries were viewed ad external to economies, like a force to which economies adjust. Periodically new advances in scientific and technological knowledge occurred. Firms and industries, incorporated new technology into their products and production process to increase or to maintain their revenues. After making some adjustments, they continue to settle into long-run equilibrium position. Economists believe that technological advantage is related to advance of science, which is very important for market system. Some of economists see capitalism is the as driving force of technological advantage. Technological advantage arises from rivalry among individuals and firms that motivates them to seek and exploit new opportunities of profit and of expanding. This rivalry occurs between new firms and existing ones. Entrepreneurs and innovators are viewed as heart of technological advantage.

Barriers to entry in a Pure Monopoly

   A pure monopoly is a market model in which entry is blocked. So what factors (barriers to entry) prohibit firms to enter this industry?

Economies of Scale
   Modern technology in some industries is such that it permits extension of economies of scale- declining ATC (average total cost). So a firm’s production price will decline if a wide range of output is produced. Given a market demand, only a few large firms, or even a single one, can achieve low average total costs. When long-run ATC is declining only a single producer, a pure monopolist will be able to produce any particular output at minimum total cost.
   If pure monopoly exists in an industry, then economies of scale will serve as entry barriers and will protect the monopolist from competition. New firms will try to enter the industry as small-scale producers but they won’t be able to produce the output at that small price produced by monopolists, so these small firms won’t be able to obtain normal profits needed for survival. A new firm might try to enter as a big producer, but the massive plant output will require very huge amount of financing, which for a new and untried firm will be very difficult to get. In most cases the financial obstacles and risks to start a big business are hinders, that’s why entering in a pure monopoly market system is rarely successful.
   There may be some cases in which market demand curve is cutting long-run ATC curve in a point where ATC curve is still declining  we say that in this case a natural monopoly exists.  So if ATC curve is declining we might say that this firm may set a lower price for its products, but this doesn’t really happen. Conversely, a natural monopolist might set its product’s price far above ATC, so that it obtains an economics profit, that’s why government has to regulate price charged by natural monopolists.

Patent
    A patent is investor’s right to use his or her own invention. Patent and patent’s law protects inventor from rivals who use the invention without helping with expenses or effort at developing it.
   Research and development is what provides our world with new amazing inventions. Firms may get monopoly power by researching or purchasing patents from other firms so they may strengthen current market position.
   The profit from one patent can finance the research for other patentable products. So, monopoly power achieved through patents may self-sustain firm, even if they eventually expire.

Licenses
   Government may limit entry into an industry by licensing. In a country only a small number of licenses for telephone operators may exist. That’s why new telephone operators can’t enter this industry. In some cases government may license itself at providing some products and that’s how it creates a pure monopoly.

Private Property
   A monopolist may use private property as an obstacle to eliminate rivals. So a firm that controls an important resource needed for production of a specific good may effectively block entry of new rival firms.

Pricing
   In some cases a monopolist may create entry barriers by cutting products’ prices, stepping up advertising, or taking other strategic actions to make entrance for a new firm difficult.

Market System part II

There are two important components of market system: households (consumers) and firms (producers). The main roles of households are to sell resources and to purchase goods and services. In free market system households are able to buy the goods they want, so that they are dictating the demand. This kind of system don’t collapse, because firms produce the kind of goods and services that demanders need and the latter ones provide resources and labour force  that firms need.
You may ask “from where firms know what to produce?”.  The answer is quite easy. Suppliers seek profit and try to avoid losses, so they will produce the goods and services that continue to offer them profit.
Consumer register their needs on the demand side of the market, so firms and products suppliers respond to this demand by completing this demand.

Dollar Votes
Consumer sovereignty is represented by consumer demand, which is crucial for determining the type and quantity of goods to be produced. They spend their wages on the goods they are willing and able to buy. By these dollar votes consumers registers their needs on the demand side of the market. If a dollar vote for a certain good is high enough to produce a profit, the industry will expand so will production quantity of it. Otherwise, if there exist a decrease in demand, or fewer dollar votes cast for that good, industry will contract. We may say that the consumers are sovereign, because they collectively direct the market, in sense to produce more goods of some type or not.

Freedom of Market
Actually, firms don’t produce the goods and services they want, they rely on consumer’s buying decision and demand. Ones which don’t obey the rule of the market may face great losses or even bankruptcy.

This fact remains true also for resource suppliers. The demand for resources is called derived demand, derived from demand for goods and services. Consumers register their wants on the demand side of the market, producers and resource suppliers respond to these wants by creating supply for these goods.

Production Techniques
In each industry the firms which are able to survive are the most profitable. Competition eliminates producers which are not profitable and efficient, and ones that require less production costs survive.
Least-cost production means that these producers must have the most economically efficient production technique.  Efficient production depends on:

• Available technology
• Prices of resources

Economic efficiency means obtaining a particular output by using least input of scarce resource, while both input and output are calculated in the same currency.

Changes
Let’s suppose that buyers change their taste and don’t want to buy apple but they are willing to buy cherries. These changes are communicated to producers by an increase in demand of cherries, so the price of apples will decrease and that of cherries will increase. Some of these firms that activated in apple production may leave this industry, because they don’t seek losses. In contrast, in cherries industry some new firms will enters, because they seek self-interest. Higher profit will make cheery industry to expand. Firms will pay even more money to resources producers, who will find some alternatives to get more cherries. So demand can contract or expand an industry.

Technological Advances
New capital permits firms to spend less money on production of a good. So the costs are decreasing which offers suppliers higher revenue. Market system is conducted by a very fast spread of technological advances through industries. Rival firms must follow these technological advances elsewhere they may suffer losses or even a total failure. Creative destruction is destruction of market positions of firms that are using older ways of production, by creating new products and new production methods.
Entrepreneurs sometimes spend their revenue on purchasing capital goods. This yields higher revenue in future if new technology is more effective.  By selling ownership shares the firm casts dollar votes for buying new capital goods.

Key Terms:
Consumer Sovereignty-Determination by consumers of the types and quantities of goods and serv­ices that will be produced with the scarce resources of the economy.
Dollar votes- The “votes” that con­sumers and entre­preneurs cast for the production of consumer and capi­tal goods, respec­tively, when they purchase them in product and resource markets.
Derived Demand-The demand for a resource that depends on the demand for the products it can be used to produce.

Capital Goods,Specialization…

Technology and Capital Goods
   Market system needs extensive use of capital goods. Supplier’s self-interest, competition, willingness for high-revenue and freedom of choice create a motivation for using technological advantage. In order to have high income an economic unit should grow very fast and have a high efficiency at output production, that’s why suppliers are building capital goods like: machineries, tools that create facilities for goods storage and transportation.
The only way to acquire a high efficiency at production is to rely on roundabout production.

  Division of labour
   Human specialization, which is also called division of labour, contributes society’s output in several ways.

• Specialization helps us to take advantage of our differences. For example one which are better at math will be an accountant, so this person will do his/her job faster than one which is good at writing poems.
• Specialization helps to improve our abilities by doing. If we devote our time to a single task, we will be able to do it faster and more efficient than if we would do multiple actions in the same period of time.
• Specialization saves time. By using all our time to a single task we don’t have losses in time, in contrast to when we shift among more jobs.

Because of this reasons specialization help a society to create more output from the same scarce resources.

   Money
   In economics money has diverse functions, but the most important of them is using it as a medium of exchange. It makes trade easier.
Let’s take a case in which money doesn’t exist. So the only way some countries can exchange their goods is by barter-exchange of one good by another one. But, here some problems arise. One of them is coincidence of wants between demanders and suppliers. Let’s take one case. Country one (excess potatoes, needs carrots), country two (excess carrots, needs apples), country three (excess apples, need potatoes). In this case trade can occur, but what if country three had excess potatoes and demanded apples? For sure, barter would be very difficult or even impossible. That’s why using money is so convenient. One important property of money is that it should be accepted by sellers in exchange for their goods. The fact that different countries have different currencies makes international trade a little bit difficult, but we shouldn’t forget that there are right now currency exchangers that are very useful if we want to buy some goods from a country that has a different currency. Money helps countries to get some amount of goods that are even impossible without international trade, because that point lies outside of PPC.

Key Terms:
Roundabout Production-The construction and use of capital to aid in the produc­tion of consumer goods.
Specializa­tion-The use of the resources of an individual, a firm, a region, or a nation to produce one or a few goods and services.
Division of Labour-Divid­ing the work required to produce a product into a number of different tasks that are per­formed by different workers.
Barter- The exchange of one good or service for another good or service.

Important Assumptions Related to Production Possibilities Curve

Let’s now discard the first three assumptions underlying the production possibili­ties curve and see what happens.

Unemployment and Productive Inefficiency

    The first assumption was that our economy was achieving full employment and pro­ductive efficiency. Our analysis and conclusions change if some resources are idle (unemployment) or if least-cost production is not realized.Any points on PPC represent maximum outputs possible to be produced; they illustrate the combinations of goods that can be produced when the economy is operating at full capacity—with full employment and productive efficiency. With unemployment or inefficient pro­duction, the economy would produce less than each alternative shown in the table.

Graphically, we represent situations of unemployment or productive inefficiency by points inside the original production possibilities curve.  A move toward full employment and pro­ductive efficiency would yield a greater output of one or both products.

A Growing Economy

   When we drop the assumptions that the quantity and quality of resources and tech­nology are fixed, the production possibilities curve shifts positions—that is, the potential maximum output of the economy changes.

INCREASES IN RESOURCE SUPPLIES

    Although resource supplies are fixed at any specific moment, they can and do change over time. For example, a nation’s growing population will bring about increases in the supplies of labour and entrepreneurial ability. Also, labour quality usually improves over time. Historically, the economy’s stock of capital has increased at a significant, though unsteady, rate. And although we are depleting some of our energy and mineral resources, new sources are being discovered. The development of irrigation programs, for example, adds to the supply of arable land.

The net result of these increased supplies of the factors of production is the ability to produce more goods . Thus, 20 years from now, there  may be greater abundance of resources ,therefore, this will result in a greater potential output of one or both products at each alternative. Soci­ety will have achieved economic growth in the form of an expanded potential output.

But such a favourable change in the produc­tion possibilities data does not guarantee that the economy will actually operate at a point on its new production possibilities curve. Some 15 million jobs will give China full employment now, but 10 or 20 years from now its labour force will be larger, and 15 million jobs will not be sufficient for full employment. The produc­tion possibilities curve may shift, but at the future date the economy may fail to produce at a point on that new curve.

ADVANCES IN TECHNOLOGY

     Our second assumption is that we have constant, unchanging technology. In reality, technology has progressed dramatically over time. An advancing technology brings both new and better goods and improved ways of producing them. For now, let’s think of technological advances as being only improvements in capital facilities— more efficient machinery and equipment. These advances alter our previous dis­cussion of the economic problem by improving productive efficiency, thereby allowing society to produce more goods with fixed resources. As with increases in resource supplies, technological advances make possible the production of more goods.

Thus, when either supplies of resources increase or an improvement in technol­ogy occurs, the production possibilities curve shifts outward and to the right. Such an outward shift of the production possibilities curve represents growth of economic capacity or, sim­ply, economic growth: the ability to produce a larger total output. This growth is the result of (1) increases in supplies of resources, (2) improvements in resource qual­ity, and (3) technological advances.

The consequence of growth is that our full-employment economy can enjoy a greater output of goods. While a static, no-growth economy must sac­rifice some of one product in order to get more of another, a dynamic, growing economy can have larger quantities of  products.

Economic growth does not ordinarily mean proportionate increases in a nation’s capacity to produce all its products.

Terms:

ECONOMIC Growth An outward shift in the production possibil­ities curve that results from an increase in resource supplies or quality or an improvement in technology.