The Effects of Innovation and Technology on the Cost of Production, Essay Example

Effects of innovation and technology on cost of production

In general terms innovation and technology make the amount of resources required, per unit, lower. An example being in the deployment of a computer software application. If you placed say an inventory control software system to do the job of five people , then the resource costs decrease. The concept of innovation can be seen as a dynamic driver in most markets. It often produces subtle positive changes as opposed to more ground breaking innovations which are normally a rare occurrence. This is because many new products or innovations are often similar to existing ones on the market and the differentiation is often feature rich enhancements that provide more usability or additional benefit to existing products. (Riley).

The application of cost reducing innovations assists in creating an outward movement in market supply and as such increases the scope of businesses to improve their profit margins. This in turn optimizes the use of scarce resources and reflects in increased productivity gains. This has a residual effect that benefits customers who make gains by lower prices. This in turn increases the level of real income and creates a higher consumer surplus which provides the incentive to pay higher level of wages and thus boost living standards. A somewhat cyclical effect that benefits both the manufacturer and end consumer alike.

How does technology affect real world competition?

Most real world firms are focused upon profit maximization and as such they are concerned with both short and long term profit maximization. Some real world firms tend to focus on maximizing profits where others emphasise the importance of growth potential in sales or programs of cost reduction to increase the longer run profits. One of the major drivers in recent years has been through innovation and technological development. The latter being focused on the discovery of new or innovative products. A good example being that of Apple Corporation who have produced a range of innovative products to the market place. (Krugman)

There is a direct correlation between technology and that of globalization. The advances in technology require large capital sums of investment and commitment in terms of time and money. In addition, large expenditures in terms of ploughing money into expensive research and development. This often means that most technological advances come from large Corporations that have the monetary power to support such initiatives. This often means organizations like High Technology Companies, Pharmaceuticals and Chemical producers. In addition, the concept of globalization allows for the threat of new entrants and specialization with competitors who seek to claim a share of innovative markets. We have seen evidence of this in the space created by Apple and other firms like Blackberry and Microsoft who have competed for product space.

Globalization has equally become a driver in technological innovation and has provided firms with greater incentives to develop new technology and the advent of the internet has expanded market horizons into essentially one large domestic market place. This impacts market structure in the sense that perfect competition leads to more efficient outcomes whereas other market structures lean towards dead-weight loss. (Stafford)

Works Cited

Krugman, Paul. “A Model of Innovation, Technology Transfer, and the World Distribution of Income.” Journal of Political Economy, Vol. 87, No. 2 (1979): 252-266. University of Chicago Press.

Riley, Geoff. Technological Change, Costs & Supply in Long-run. 9 2006. http://tutor2u.net/economics/revision-notes/a2-micro-technological-change.html. 29 2 2012.

Stafford, George E. Johnson and Frank P. “International Competition and Real Wages.” The American Economic Review, Vol. 83, No. 2 (1993): 127-130 . American Economic Association.