In the course of the past two decades, the world of commodities has been largely influenced by a cycle of rising and falling prices of energy, raw materials, and products due to the onset of an era of new technologies. Indeed, technological innovations, including the adoption of the Internet of Things, artificial intelligence, robotics, and data analytics, coupled with microeconomic and macroeconomic trends are now at the core of transformation of the consumption and production of products. These tendencies imply that new technologies have significantly influenced equilibrium in product markets. This essay explores this influence while focusing on the automotive and computing sectors. The justification underlying the choice of these sectors is their maturity as well as their massive economies of scale, oligopoly competition, and capital intensiveness. Specifically, the author addresses two types of technologies: The first type influences the supply curve by improving the flexibility and efficiency of production lines in mainstream products while the second type impacts the demand curve by incorporating ground-breaking features in products.
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Effects of new Technology on the Equilibrium in Product Markets and the Economy
Technology Influencing Supply Curve
Microeconomics. The entre marketplace is made up of consumers and companies that produce a specific group of products. In economics terms, this includes low-end, mainstream, and high-end or luxury products. The market equilibrium is represented by point A in figure 1, where the demand is equal to the supply of goods. At price P1, the equilibrium output is Q1. The demand and supply curves are not necessarily represented by straight lines as shown in figure 1 in a real world scenario but rather by parabolic curves. The oligopoly tendencies depicted by the automotive and computing markets can be illustrated using a kinked demand curve with elastic demand from a low quantity to the equilibrium point and inelastic demand from that point onwards. Both markets are moving toward perfect competition due to the projected increase in the demand of vehicles and computing hardware.
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The introduction of new technologies augments efficiency of production and enhances productivity. As a result, the supply curve shifts to the right in response to the increase in production and decrease in price. Past studies have supported this supposition with Khan Academy (2010) and Boundless (2017) reinforcing the case for lowered production costs and increased outputs. There is also a strong link between these trends and the adoption of new technologies in the production process. The incorporation of technologies is not only beneficial to the firms but also to the consumers because the market is able to supply more vehicles at cheaper prices. Even so, massive automation in factories could cause the rise of unemployment, especially when perceived from a macroeconomic viewpoint.
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Benefits to some firms may be trivial since the new equilibrium point symbolizes increase inequalities and decrease in prices. The elasticity of the demand curve poses a profound effect for all firms operating in the market. In particular, there’s a huge gap between elastic and inelastic demand curves since the gain minus the loss is relatively higher in inelastic demand. Mainstream products are particularly crowded and have many substitute goods with similar traits, which means that the demand curve will portray elastic behavior and increase the revenue for firms. Thus, it can be argued that firms aim at the production of more products because they are likely to record higher financial rewards, but this profitability cannot be equaled and is quite different from the sales revenue.
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In perfect competition markets, such as the automotive industry, each company experiences a perfectly elastic demand in which the marginal revenue and the average revenue are equal unceremoniously. Thus, it is anticipated that any company that augments its productions with new technology will record higher output capacities and lower production costs. Nevertheless, it is important to note that not all operations in the firm are profit maximizers, a good case being corporate social responsibility involvement.
Macroeconomics. The introduction of new technology inflates the Production Possibility Frontier (PPF) in the economy. A simple economy that produces two products – computing hardware and C-segment vehicles – is represented in Figure 2. The adoption of new technologies pushes the PPF toward the positive direction from A1B1 to A2B2, owing to the fact that the same capacity of resources generate a higher quantity of goods. Thus, technology brings about an expansion of the economy regardless of the robots vs. human resources debate. When introduced in the long-run, new technology causes to a small increase in aggregate supply, leading to a deflationary boom in which inflation decreases and output increases (EconomicsHelp.org, 2016). Be that as it may, small production outputs cannot elicit noticeable changes in aggregate supply.
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Increase in production outputs is advantageous to the economy as a whole because it creates abundance and cuts down unemployment, though extensive adoption of automation may lead to joblessness. The case of unemployment arising from technology has existed since the inception of the steam engine in the eighteenth century and some countries are planning on solving the problem by introducing universal salaries to protect labor forces that are constantly replaced by new technologies.
Apart from unemployment, the other issue concerning macroeconomics is inflation. Many economists suggest that a level that falls below the target point of two percent is ideal. The monetarists believe that inflation is subject to money supply and central bank policies. Their argument is that expansionist monetary policies lead to lower interest rates when inflation falls below the target point, resulting in cheaper loans, lower savings, higher expenditure and consumption, as well as enhanced investments. Thus, inflation rises after some period, causing opposite effects in the economy. On the other hand, Keynesians embrace monetary policies and consider the role of the government in the control of the economy via fiscal guidelines.
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Technology Influencing Demand Curve
Microeconomics. When firms include new technologies in products, there are two expected effects in the demand curve. Initially, the products will elicit higher demand because of the new differentiated features (Singh, 2006; Case at al., 2014). Nevertheless, for the case of the automotive industry, another effect could be an upsurge of product sharing such as the situation of Uber. Figure 3 illustrates the increase in demand from QD1 to QD2 and the resultant shift of the equilibrium from point A to point B. This further reflects an upturn of prices from P1 to P2 and the rise of production from Q1 to Q2. Hence, the firm records higher profitability from the produced goods.
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On account of technology, the demand curve is likely to have elastic behavior primarily because the new products contain new features which make the market more tolerant to price alterations. Small changes in production could cause a pronounced increase in price in the case of increased production. Oppositely, more elastic curves can be characterized by smaller changes in price in response to bigger changes of production (Gillespie 2015). The combination of both effects can be illustrated by a shift of the demand curve to the right and less elasticity. This translates to an advantage for firms operating in the markets since it can lead to high production until marginal costs equate to marginal revenues, with additional benefits of increased revenues.
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It is important to note that when differentiated products, such as autonomous cars, include new features, some firms would lose their innovation and result in higher elasticity in the market. This will be most likely the case with C-segment vehicles which can present an analogous demand curve branded by a small increase in demand, because of the added value of new technological functionalities. Under the new equilibrium, the mainstream segment of products would enjoy the advantage of an augmented demand, which would further translate to higher prices, outputs, and revenue.
Macroeconomics. With assumption that a set of mainstream products contain a new technological feature, the resultant trend would be the solution of a common problem in the society. For instance, if autonomous driving goes mainstream in all vehicles in the C-segment, the general society would experience the effects of fewer accidents, more time because of less driving tendencies, fewer taxi drivers, among other implications. People could use the saved time for other activities like schooling, working, or even entertaining themselves. Notably, this additional time can have numerous benefits for the economy especially for the case working individuals (Caselli & Coleman II, 2006). Figure 4 shows the effects of expanded PPF.
The inclusion of new technology in products can also lead to demand pull inflation, a case where the economy experiences an increase in inflation and national output. Considering the case of autonomous driving, the increase of demand and consumption of vehicles with revamped features along with an increase in investment by companies, and thus increasing stocks and assets, could compel the government to boost expenditure through the implementation of updated transport systems and the export of goods in the case of countries that manufacture those products. The increase of national output is particularly beneficial to the economy although an increase in inflation can elicit mixed effects based on the closeness to the inflation target. In this case, Keynesians and monetarists would apply the method discussed earlier.
In general, new technologies affect the supply curve while other minor aspects of technology modify the demand curve. With regard to the equilibrium price point, the supply curve slopes left to right while the demand curve slopes downwards. The intersection of the two is called the equilibrium price point. Adoption of technology in a bid to augment production most commonly shifts the supply curve. This is because technical advancements in production imply that firms can produce more products at lower costs, thus pushing the supply curve from left to right. Further, this lowers the equilibrium price point with the exception of special cases where demand rises to meet the augmented production at the current prices. Contingent on the type of good under scrutiny, technology can eliminate demand completely. For instance, a good can become obsolete after technological advancements facilitate the production of a more effective substitute good that sells at the same price point. Technological advancements can also ease the process of market entry in some industries or even make a sector more attractive to suppliers. The entry of more suppliers in such a case would push the supply curve outward owing to the increase of goods in the market at the same price point.
In sum, this essay has explored the effects of new technologies on the equilibrium in product markets and the economy in general. Firstly, the author has concluded that technology can lead to improvements in production lines and consequently affect the supply curve. In a microeconomic point of view, technology brings lower prices to consumers and higher revenues to firms due to lower cost of production of each product. Even so, profitability may not equate to revenues because of factors that dominate the case of each firm. Taking a macroeconomic approach, it can be said that technology can enhance PPF and augment a country’s production output. Even so, it may have adverse effects on employment since the inclusion of technology in production lines eliminates the need of human labor. Secondly, the author infers that the incorporation of technology in products can cause an increase in demand. In a microeconomic viewpoint, the adoption of technology in products introduced product differentiation which further causes a reduction in elasticity of the demand curve. Finally, the macroeconomic discussion finds that products that are differentiated on the basis of technology save time and effort which can be used for other productive activities that are beneficial to the economy. Decisively, it can be surmised that new technologies lead to increased production in all industries, additional supply of products to the market, reduced prices for the consumers, higher revenues for firms, higher unemployment rates, conservation of time and effort, and higher productivity in the economy.
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