Technological change and the impact upon firms

Technical change attempts to raise the productivity of capital, leading to a potential greater return of output compared to the inputs. Technological change appears to improve quality of life for new generations. 

According to the textbook, technical progress has three main 'components'

1. 'More output can be produced with the same inputs'
2. 'Existing outputs undergo an improvement in quality'
3. 'Completely new goods or services become available' 

Technological change has two main features:

• Innovation - This refers to changes to original products or ideas as to put them into commercial use. They are often subtle changes to change performance of a product. A well known example is Apples ever improving IOS capacity and obviously, the iphone models. 
• Invention -  Discovering completely new ideas or concepts, ready to be patented.

Product invention and innovation act to create new markets and markets segments, with 'synergy demand' being incredibly relevant in today's ever modernizing world. This refers to extra demand being created for existing products as a result of an innovation, such as the increasing demand for oils and balms for a new razor which are both owned by one firm. 

Innovation can lead to 'disruptive innovation' however, whereby innovation can act to upset all that is known in the market so far. An example is the prevalence of downloading music online, which majorly disrupted the music industry - which was witnessed with the closure of HMV's nationally as the company attempted to 'streamline' the business as to not make huge losses. 

Joseph Schumpeter stated that innovation and 'created destruction' are related. He describes creative destruction as a process of destroying all that is known in the market and subsequently replacing it with new and better goods or services. 

Innovation = dynamic efficiency as changing consumer needs and wants are met temporally. 

Innovation can act to lower the unit costs of firms, as a result, the LRATC is said to have shifted downwards underneath, still keeping intact its downwards sloping nature. As a result, firms can relieve pressure on prices and potentially gain increased demand. Firms that have not benefited from the innovation may find competition intense as they may not be able to relieve pressure on prices, making their firm possibly undesirable to consumers. 

However, innovation can act as a barrier to entry within a market with the introduction of patents and copyright. Innovation could lead to a firm gaining monopoly power- this is especially prevalent in the pharmaceuticals market, such as Pfizer's Viagra. 

Note: I am using notes from Tutor2u and the AQA Economics Textbook to formulate this blog. I do not claim that some of these notes are entirely my own.