Technological Change (AQA A Level Economics)

The Distinction Between Invention & Innovation

• New business ideas can come about through original ideas or by adapting existing products, services, or ideas
  

• Invention refers to the creation of entirely new products and processes that did not exist before.

  • E.g The printing press was invented in 15th century and led to the mass production of books

• Innovation refers to the development of existing products, designs or ideas to improve them or introduce new features

  • E.g The printing press evolved to become more efficient with steam-powered presses and later digital printing technology 

Technological Change in Production

• Advances in technology can create new opportunities to improve methods of production, productivity, and efficiency.

  • These factors all have the potential to decrease a firm's costs of production

Advantages of Technological Change on Production

Technological Change Creates New Products & Markets

• The rapid evolution of technology has prompted industries to come up with new ideas, products and features to gain consumers and access new markets

• Consumer tastes and preferences are also increasingly being influenced by what new technology offers

• Businesses then need to continuously adapt products and processes to meet the changing environment

• If they do not adapt, it can mean the loss of some businesses or even whole industries

  • E.g There was a fall in demand for traditional DSLR cameras or vinyl records as consumers preferences were for more modern alternatives. However, these industries have actually experienced a recent resurgence as consumer have begun to appreciate the artistic value of these goods

The Impact of Technological Change on Existing Markets and in Creating new Markets

Creative Destruction & Technological Change 

• Creative destruction is closely linked to technological change

  • Technology has led to the decline of traditional industries, as innovative products and processes emerge and new industries replace old ones

• Technology create opportunities for new business processes, goods and services and may eliminate existing ones

  • E.g The rise of online streaming platforms (Netflix, Prime, etc) has replaced the less convenient traditional video rental shops. In the past, people used to physically rent videos from a video store, such as Blockbuster. With the introduction of streaming services, consumers now have instant access to movies from their own homes 

How Does Technological Change Influence Market Structure?

• Technological change has the ability to change some of the characteristics traditionally found in certain market structures

Diagram: How Technology Influences Market Structures

Technology can lower barriers to entry and increase the level of competition in an industry

Technology can reduce barriers to entry

• Small businesses may be able to enter markets that are normally dominated by larger firms

  • E.g. A jewellery maker can set up shop on Etsy and showcase their designs to a large market

Technology can reduce information asymmetry

• Web technologies can harness, analyse, interpret and present large amounts of information quickly

  • Information on pricing and products is much more easily available

  • E.g Skyscanner, Google Shopping, and PriceRunner allow consumers to compare prices and see reviews

Technology can increase competition

• As more firms can access e-commerce platforms, digital marketing, and online marketplaces, which increases access to larger markets 

  • E.g  Airbnb's online marketplace connects local hosts with customers from around the world

Technology can increase market power

• This can result in the formation of more oligopolies or monopolies

• E.g Technology giants Google and Amazon have gained significant dominance due to factors such as brand loyalty and economies of scale, making it difficult for smaller competitors to enter the market