Factors of production typically include land, labor, capital, and natural resources. These inputs are used directly to produce a good or service. Technology, on the other hand, is used to put these factors of production to work. A firm doesn't purchase additional units of technology to feed into the production process in the same way that a firm might hire more labor in order to increase output. Instead, the technology available in a particular industry or economy allows firms to use labor and capital more or less efficiently. It is important to note that advances in technology are a result of innovation, innovative practices such as process changes are also worth mentioning in this context. Innovation is the driving economic force behind these leaps in efficiency.
Technological change is a term used to describe any change in the set of feasible production possibilities. A change in technology alters the combinations of inputs or the types of inputs required in the production process. An improvement in technology usually means that fewer and/or less costly inputs are needed. If the cost of production is lower, the profits available at a given price will increase, and producers will produce more. With more produced at every price, the supply curve will shift to the right, meaning an increase in supply and a decrease in prices. For the economy as a whole, an improvement in technology shifts the production possibilities frontier outward .
Production Possibility Frontier (PPF)
An increase in technology that allows for greater output based upon the same inputs can be described as an outward shift of the PPF, as demonstrated in this figure.
The invention and popularization of the assembly line is an example of process change, which is worth mentioning in context with technological change. Innovative practices to how we do this is an example of the way in which output can be increased with the same input, and is often discussed in conjunction with technological innovation. During the industrial revolution, many products that had previously been created by hand by a single person or a team of craftsmen began to be manufactured instead in factories in which each worker performed one simple operation. This meant that companies could produce much more output using the same amount of raw materials, capital, and labor. Supply of these goods increased, and the production possibilities curve for the entire economy shifted outwards.
Technological change in the computer industry has resulting in a shift of the computer supply curve. Due to advances in technology, computers can now be manufactured more cheaply, even though they continue to grow smaller, faster, and more powerful. Producers respond to the cheaper production process by increasing output, shifting the supply curve outwards. Thus, the number of computers produced increases and the price of computers falls.