Y2 34) Technological Change - Invention, Innovation, Efficiency, Barriers to Entry Transcript, AI Summary & Key Points

00:00 Hi everybody. Technological change has been happening rapid pace over recent periods of time and for various reasons. You could argue that knowledge has been improving. Um that capabilities have increased to engage in in greater R&D and new technology improvements to come about. As a result, there has been a greater source of funding for such investment to take place.

00:20 And you could argue there has been greater access to patents, to copyrights, to licenses um to incentivize technological change in R&D expenditure. There are two different ways of looking at technological change that you need to be aware of. The idea of invention compared to innovation. Invention is just the creation of a new idea without that idea necessarily becoming a commercial reality.

00:42 Whereas innovation is taking invention and making that into a commercial reality. So taking ideas and making those into commercial ideas, making a business out of them. Um innovation can be small scale whereby this the production process of a business improves or it could be much greater where new products are invented, new services are invented and in that respect innovation could be quite destructive.

01:09 The idea of creative destruction of innovation is a big idea that coming out with new products, coming out with new services, revolutionizing a given market could one while one destroy pre-existing markets, it could destroy pre-existing businesses and therefore destroy jobs that used to be in those markets in those businesses. That's the idea of creative destruction.

01:31 If we look at some examples of that, the mobile phone industry is a very good example how mobile phones have developed over time. you know previous developments are now completely redundant and those businesses have now been destroyed completely. If we look at cars versus public transport as cars have become better and better and better more cheaper they have destroyed uh public transport markets in various locations around the world.

01:54 If you look at the taxi market and the rise of Uber you know destroying other more traditional taxi services. The rise of Airbnb you know destroying again traditional hotel models and hotel uh chains. uh you look at uh for example the way in which we're listening to music now and how initially it was Walkman's destroyed CD players destroyed MP3 players destroyed and how listening to music has become very much online and streaming based nowadays the same argument for the way in which we watch TV and uh and films you

02:22 know and and how you know videos have gone DVDs have gone everything has become very online the destruction of pre-existing markets the destruction of businesses the destruction of jobs innovation can be very destructive ive in its creativity. If we look at methods of production with technological change, well, technological change could lead to more capital intensive production whereby the capital to labor ratios favor more capital intensive production.

02:50 So, if you look at um car production, for example, the use of robots now being able to replace workers has led to much more capital intensive production in that industry. But also, um technological change could lead to more labor intensive production. It just depends on the industry. So if you look at medical services for example, lots of new technological advancements when it comes to medical services and those uh uh that kind of capital, those technological services require the use of labor to operate them.

03:20 Uh so maybe in those sectors you could argue more labor intensive production as a result of technological change. So it very much depends on the industry whether capital to labor ratios go more in favor of capital or go more in favor of labor. Generally though what economists tend to argue is that in recent time technological change has um definitely increased jobs has created jobs as opposed to destroying jobs.

03:45 Whether that trend is going to continue many economists say be careful over the next 50 years. There is no guarantee that that is going to be the case. More likely we might see capital replacing labor and the destruction of jobs as technology improves. But certainly over recent time over the last 50 years or so, 40 years or so, you could argue that more jobs have been created with technology as opposed to being destroyed.

04:08 What about costs of production? Well, we've learned with very simple microeconomic analysis that technology will reduce costs of production for businesses um and therefore the supply in a individual market will shift to the right. Looking more technically now, we can say for a business that technological change will reduce costs of production over time.

04:29 longer run and average cost will therefore decrease. We can be more precise and say actually if there is better technology now in given industries then specialist capital can be brought in, specialist machinery can be brought in achieving technical economies of scale. Also technology allows for specialization and the division of labor ID to be brought in as production processes can now be broken down into production lines thus improving productivity and efficiency.

04:56 That again is technical economies of scale. So not only can we draw a long run average cost curve which is below a pre-existing one showing a reduction in cost of production but we can also show that the minimum efficient scale of production can take place at a greater level of output now because there is a greater exploitation of economies of scale that is possible with greater improvements technology.

05:16 So we've shown here a reduction in costs. Yes, a reduction in cost of production, but also an increase in quantity as the minimum efficient scale takes place at a great greater level of quality, signifying that there are more economies of scale to be exploited with greater technology. What about efficiency? Can improvements in technology improve efficiency?

05:38 Well, as this diagram clearly shows, productive efficiency could well increase as costs of production are lower as the mees point is now at a greater level of output. Whether allocative efficiency occurs depends on whether the lower cost from productive efficiency is then passed on to consumers via lower prices. But certainly we expect to see dynamic efficiency as technology improvements uh lead to innovation, lead to new products, lead to new services um out there which is great for consumers.

06:05 So technological change we can expect will promote dynamic efficiency over time. Well to see how technological change has affected market structures let's break down by looking at the individual characteristics of different markets. Let's go straight to barriers to entry first. And if we look at technological change in terms of the greater role of the internet.

06:25 We can see first of all that barriers to entry has significantly come down in many different industries. uh less need for physical premises. If you take online retail for example, without having to operate a physical premises, having a physical shop, startup costs have come down significantly. Sunk costs have come down significantly. These are two major barriers to entry that have now massively come down.

06:46 At the same time, if you don't need if you don't need a physical premises, then it's much easier, you might say, to meet certain regulations, certain legislations that government enact. At the same time, if you're not employing as many workers because you don't have a physical premises anymore, it might be easier to meet employment law, too. So, various legal barriers to entry are now much lower and much easier to meet, you could say, because of the greater role of the internet.

07:10 You can also say that um advertising is much easier to do with a greater role of the internet, which can reduce the brand loyalty aspect of a barrier to entry. Um therefore, firms, you know, can use like social media for example to advertise. um they can break into markets much easier because of the internet reducing a key barrier to entry which is brand loyalty and heavy advertising of incumbent firms.

07:32 On the flip side though you can argue that in some industries barriers to entry have actually increased. One example is looking at the economies of scale arguments that we used before. Another way to look at it is if uh firms are able to access greater copyrights, greater patents by uh inventing new technology thus restricting competition in certain industries.

07:54 So you can argue it two ways but I think most economists would say that because of the greater role of the internet um barriers to entry have actually come down and markets have become much more competitive. What about number of firms? Well, number of firms depends very heavily on the level of barriers to entry. barriers to entry have been significantly reduced in the way we've just explained then more firms will be in the market and you'll see more competitive outcomes as a result but if barriers to entry increased

08:20 then you'd expect the number of phones to be less and be more monopoly outcomes especially where there are patents and copyrights in play take the pharmaceutical industry for example product homogeneity would of course with technological change you'd expect much greater variety of products and services and that's exactly what we've seen so less homogeneity less similarity of products and much more variety with goods and services out there in the world.

08:45 What about knowledge? Well, you'd expect that technological change would drastically improve knowledge. The role of the internet improving price information for consumers, but also for producers. You know, being able to access new technologies and if a company has come up with a brand new innovation or new technology in a given product, other companies can take that and strip it down to its component parts and see and copy those technologies.

09:07 So it's improved information for individual businesses as well. So consumers and businesses you can argue have got better knowledge of market conditions of prices and of costs and technology um in given markets. But you can argue that knowledge maybe has become more imperfect again where there are patents where there are licenses where there are copyrights at play and one firm has got control over that given market.

09:31 So really whether market structures have become more competitive or more concentrated depends very much on the industry. So you need to apply it to a given industry and the characteristics of that industry to see whether technological change has made markets more competitive or not. Generally though economists would say that because of the role of the internet markets generally have become much more both competitive and also contestable.

09:57 You just look at the hotel industry, you look at the taxi industry, Uber and Airbnb and how technologies has allowed those industries now to become hyper competitive industries, hyper contestable industries as well. So that covers technological change. Thank you so much for watching guys. I'll see you all in the next video.