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TECHNOLOGICAL IMPACTS ON EQUILIBRIUM IN PRODUCT MARKETS AND ECONOMY

Semester 2 Course Work 2019

Using the knowledge gained during your study an answer to the following topic:
Critically discuss how a new technology impacts the equilibrium in product markets. Also, elaborate on the potential implications of this technology on the economy as a whole.

Answer

Introduction

Technology can be termed as various methods, devices and systems which are scientifically invented to upgrade the living standards of the people in practical life. As the new technologies ease the living of people similarly it creates new markets through invention of new products which in turn create impact on the overall functioning of an economy as well. This article discusses how a new technology impacts equilibrium in product markets considering various economic models along with relevant economic concepts taking in focus with appropriate examples. In this context, the implications of a new technology on an economy also are a part of the discussion. It focuses on the cell phone industry for further discussion. In this process, various economic models will be taken into consideration like-

  • Technological impact on supply curve
  • Technological impact on demand curve
  • Technological impact on production possibility frontier
  • Technological impact on aggregate supply

Here these models are considered as supply and demand factors create significant impact on a product as these are the micro economic factors and production possibility frontier (PPF) denotes the macro factors of the economy (Solow, 2016).

 


Discussion of Economic Models

Technology impacting Supply curve:

Introduction of new technologies in market which accelerate the production of cell phone. Due to this the supply curve shifts to the right. Figure 1 shows how a new technology can improve the production. Below, the supply curve Qs1 with equilibrium of A shifted to the new equilibrium Qsas the new equilibrium shifted to B, as the production increases from Qto Qwith a reduction in price from P1 to P2. Due to the technological advancement production cost decreases with an increase in the volume of output. As a result of this, economic growth can be witnessed as efficient production process can be achieved (Brotchie et al. 2017).   


Figure 1: Increase in the supply curve (Source: Brotchie et al. 2017)


Technology impacting Demand Curve:

Suppose Xiaomi decides to introduce a new feature loaded cell phone in the market. The new cell phone will present higher demand as the new features can attract consumer interest. Figure 2 shows an increase in demand from QD1 to QD2 and equilibrium shifts from A to B as a result of increased demand. This condition leads to increase in price from P1 to P2 and also an increase in production from Q1 to Q2. This indicates a positive signal for the firm as the revenue increases. Thus by introduction of new technology in a product company can witness higher growth in revenues.    

Figure 2: Increase in demand curve (Source: Brotchie et al. 2017)

Technology impacting Production Possibility Frontier:

In an economy new technology expands the Production Possibility Frontier (PPF). In Figure 3 it is assumed that the economy produces only two goods- cell phones and computers. A new technology helps to increase the production possibility frontier (PPF) from A1B1 to A1B2 as the production of cell phones have increased after using the same amount of resources. An introduction of new technology helps to increase the output of cell phones from B3 to B4 with the same opportunity cost of computer that is A2. Hence it can be said that technological development can introduce the economic expansion.


Figure 3: Production Possibility Frontier 

(Source: Brotchie et al. 2017)

Technology impacting Aggregate Supply

Figure 4 shows how technological advancement helps in short run. Shift from AS1 to ASindicates deflationary boom, a decrease in inflation and increase in output. The increase in output indicates a positive sign for the economy as it reduces unemployment and creates wealth.  

Figure 4: Increase in aggregate supply

 (Source: Brotchie et al. 2017)


Technology impacting Aggregate Demand:

Aggregate demand shows total demand for the final goods and services of an economy at a given time and price level. Aggregate demand is nothing but the combination of total consumption, investments, and government spending and net exports of a certain economy. It can be determined using the following formula-

Aggregate Demand (AD) = C+I+G+(X-M)

As the technology introduces in a certain product cycle it enhances the product features and performance. Due to this the market tries to get the latest technology as the old one becomes obsolete or “out of fashion”. Thus new technology pushes the demand on the higher side.

Figure 5: Increase in aggregate demand 

(Source: Brotchie et al. 2017)

The Figure 5 shows how any technological improvement has pushed the aggregate demand from AD0 to AD.

Economic Concepts:

Economic as a whole nothing but a study of choices and why and how people make those. Now some basic concepts of the economy will be focused on like scarcity, demand and supply, costs and benefits, incentives.

Scarcity- In this world people has limited resources to fulfill their unlimited wants. As a result of limited resources people need to make choices. Scarcity is a solid fact than any abstraction. Scarcity is the source of making choices. If people would have access to unlimited resources to fulfill their needs then the optimal usage of resources could not be achieved. For Example, while choosing a budget cell phone people go for the highly features loaded option available in that budget range (Kulikova et al. 2016).

Demand and supply- These two factors are the main driver in case of deciding the market system. Let’s take; people want more technologically equipped cell phones, that means the demand for those technologically equipped cell phones is high. This demand leads to the situation where market can charge high price for those high end technological cell phones. Attracting with this high revenue more firms start producing high end cell phones and after a few production cycles the supply of high end cell phones will be exceeding the supply of the same. This cycle is going on and on until the market finds the appropriate equilibrium (Kulikova et al. 2016). 

Costs and benefits- People always try to choose which gives them more benefits with less cost. Basically it implies people always prefer those which provide more benefits than the costs. For example, if demand is high firms will hire more employees however only if the price of the cell phones and the sales volume justify the additional costs incurred. In the same sense consumer will buy the cell phone he/she can afford not the one which charge higher price.

There are also other economical concepts which hold relevance in the market system (Kulikova et al. 2016).   


Applications of Economic Concepts 

Almost every business use these basic economic concepts to stay in the market in the long run. Specialists in economic concepts are hired by these companies to evaluate the market implications of their products. The concepts of demand and supply are mostly used in an advanced way by most of the mobile phone manufacturing companies. For example, when Android technology was introduced by Google in 2008, the supply of basic mobile phones decreased to a great extent. When compared to the contemporary scenario, basic mobile phones are no more competition for Android mobile phones since now the competition is between android and ios mobile phones. In 2008, being a new technology in the market, the average price of an android phone was around 154 Omani Rial (Kulikova et al. 2016). As a result, there were very few customers who were ready to buy android phones because of the price range and skepticism about the new technology. 


However, when the price of android phones decreased in later years, the demand for the same increased as a result mass production of android phones took place which resulted in reduction of the prices of the android phones. Then gradually the basic mobile phones became obsolete. Today the price of android phones is approximately 77 Omani Rial. The concept of price elasticity can be understood by the fact that when prices of android decreased, there was a substantial increase in the android demand where with the previous prices the demand was negligible. Cross elasticity of demand can be related to the substantial decrease in demand for basic phones with the reduction in android prices. 


Evaluation of Economic Concepts 

Since resources are scarce in the world, there should be optimum utilisation of the available resources. Evaluation of economic concepts is necessary as it facilitates optimum resource allocation and encourages rational decision making with ethics and value. The evaluation process is based on scientific approach. It includes measurement, identification, and valuation of the economic concepts. Economic evaluation is done through Cost-effectiveness analysis, cost-benefit analysis, cost-utility analysis, discounting, opportunity costs, quality-adjusted life year, sensitivity analysis, stated preference discrete choice experiment and willingness to pay. 


These may be explained as follows:

  • Cost-benefit analysis (CBA) - It is the systematic analysis of alternatives available before a critical decision making. The results of CBA are expressed in monetary terms to get the net benefit less the cost. Cost includes all types of costs be it tangible or intangible. Opportunity costs are also included in the costs. A comparative study is conducted with the aggregate costs and aggregate benefits to find out whether benefits outweigh costs. If benefits outweigh the costs then it is better to accept the alternative or the decision and vice versa. For example, if the manufacturing costs of android phones are exceeding the selling price of the same, then it is illogical to produce android phones as it will incur losses. The decision of not producing the same will be the result of a thorough study of demand and supply aspects of the product.
  • Cost-effectiveness analysis (CEA) - It is the systematic study of cost and effectiveness of the alternatives available. This method is used in complex situations where it is difficult to calculate the benefits of a decision or alternative in monetary terms. Various programs or decisions are compared which adopt different approaches in order to achieve the same or similar goal. For example, when android phones came in the market, customers were skeptical about the after sales service of the phones. As a result, more and more customer service centers were opened by the android phone manufacturers to address the issue of after-sales service. The customers used CEA method to analyse the reasons for buying android phones over traditional mobile phones (Young et al. 2017). 
  • Cost-utility analysis (CUA) - It is the systematic comparison and evaluation of the decision or alternative which are cannot be measured in monetary terms based on individual preferences. CUA is mostly used in healthcare sectors with the help of quality-adjusted life years.



Implications of the technology on the overall economy

As the supply of android phones increased, more employment was generated and the world economy was at a boom. Since every single day, the android technology requires critical development; there is an increase in the employment opportunity along with the contribution to overall GDP of the world. Today the android technology has achieved the market equilibrium where the prices and quantity supplied have merged with the demands and supply in the market (Van den Berg and Lewer, 2015). 


Android technology paved the way for world economic development because of the following reasons:

  • Increasing communication and collaboration drastically- There is no more need to incur expenses in order to send important information across the world with the help of android technology. Important conferences may be conducted using android mobile compatible software. Critical decisions may be taken over the phones today. It has changed the pace of business processes a lot.
  • The app market is created- There are a lot of applications in the market which are influencing people’s lives by making life simpler. The app economy has also generated employment (Pianta, 2017).
  • Lowered entry barriers for new entrepreneurs- The app creators can easily upload their applications in android supported platforms to reach millions of potential users in few seconds. 
  • Excess capacity may be utilized- Because of android technology, apps like Uber has emerged in the market which utilizes the idle cars in the transportation of people in need. This concept has generated revenue for Uber, car drivers and car owners (Yelkikalan et al. 2017).



Recommendation


From the above study it is very clear that with the introduction of new technology, the demand for old ones falls at a sharp rate along with the increase in the supply of the new one. There is a need for change in technology in a product when that product has reached market equilibrium because market equilibrium is not permanent. Evaluation of all the economic alternatives should be done to arrive at the best decision. New technologies should always be innovated in the market as new technologies have paved the way for the economic development of the world as a whole. 



Conclusion


New technology helps to improve the production lines, impacting the supply curve. In the demand and supply graph, it has been established how new technology brings an increase in the supply curve. In the macroeconomic analysis production possibility frontier (PPF) and aggregate supply have been explained and how the technological developments influence these two factors. Thus it is highly recommended to apply new technological changes in the economy as it boosts the economic growth in all aspects.  




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