AFE4001-B Business Economics Assignment - University of Bradford, UK

Learning Outcomes -

• How economic growth is linked to growth in long run aggregate supply.
• The neo classical model of economic growth.
• The convergence hypothesis.
• The endogenous growth model
• The types of policies used to promote growth and development.

Question - 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.

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Answer - BUSINESS ECONOMICS

Introduction

The economy is built up of two elements micro and macro economics which provides the vision to economy through a broad level and a narrow level. Both the perspectives provide the view of the entire economy and the demand and supply is the main ingredient of the economy. The introduction of a new technology in the product market brigs rather impacts both the demand and the supply of the economy and thus, the equilibrium gets impacted. On exploring the impact of new technology through demand and supply view, both the micro and the macro vies would be utilized for presenting the impact on the economy as a whole (Perla et al. 2015). The discussion on two new technologies would be explored; one which would be impacting the supply and the other would be impacting the demand. The automotive sector would be utilized in the writing because it is a matured industry carrying an extensive scope of economy of scales. It is also a capital intensive industry and oligopoly competition along with some trends to perfect competition would be explored.

Impact of New Technology on Supply Curve

Technology which would be impacting the supply curve would be the ones which would enhance or improve the efficiency of production lines and flexibility of the production line in C segment or medium sized vehicles or automobiles (Brotchie et al. 2017). For example: Ford Focus.

Microeconomics

On modeling the market place, it is done by summing up all the consumers and firms for some specific vehicle. In technical terms of economics, it could stated that C segment vehicles in normal goods, or in contraposition of inferior goods or luxury goods. The initial equilibrium takes place where the summed up demand equals the summed up supply and thus, the interesting point s known as the equilibrium of the market (Goos, 2018). This point of equilibrium provides the equilibrium price that is the price at which the buyers are willing to buy the product and the equilibrium quantity, which reveals the quantity in contrast to the equilibrium price at which the sellers are willing to sell the product.

The introduction of the new technology which helps in improvising the efficiency of production shifts the supply curve to the right that is from Qs1 to Qs2 which provides the new equilibrium at point B from a shift of point A. Thus it has been stated that with the introduction of new technology, the output would increase with a fall in the price from P1 to P2. Providing more and more vehicles at lower prices would benefit the consumers hugely (Platteau, 2015). Here the elasticity of demand would play a vital role in the decision making. Elasticity of demand is the rate at which the demand changes with respect to price.

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C-segment vehicles are accompanied by number of substitutes which reveals that the product would have an elastic demand that is there would be a equal proportionate change in the demand and in the price of the product. This also conveys that the revenues for the firm would increase.

As the market is the competitive one there exist elastic demand for the product and the firm is the price taker. This also conveys that the average revenue and marginal revenue are same irrespective of the output. The production would be at the point where SATC1 intersects the MR curve and this would be the profit maximizing point for the firm (Challe et al. 2017). The shift of equilibrium to QF2 reveals that the production cost ha been reduced due to the new technology inclusion and it also conveys that the average cost (AC) if kept low, the production would be increased. Thus, the firm would get more profits.

Macroeconomics

The Production Possibility Curve gets expanded due to the introduction of the new technology. This could be understood through the following figure 3.

The new technological innovation would help in the production of the goods and thus this would create a shift in the PPF curve. The shift would provide a range of new combinations of the two goods which could be produced more with the new amount of resources or technology. Thus, the invention of new technology would create on more resources or utilization of the resources immensely which would provide new combinations of the two products to be produced.

Through exploring the Aggregate demand and aggregate supply curves model the macroeconomic results could be stated more clearly. This would present the short run impact of new technology in the supply segment.

The introduction of the new technology shifts the Aggregate supply curve to the right which is known as deflationary boom, as the inflation falls or deflates from II 1 to II2, with increase in output that is from Y1 to Y2. It could even be stated that the C-segment vehicle production is such a small part of AS that it is negligible in AS. The increase in the output from Y1 to Y2 reveals that the economy would gain as there is reduction in unemployment and addition to wealth which is contradictory to the new technology invention as it is known that the new technology is the reason for increase in unemployment.

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A criterion has been marked by the economists that are if the inflation approaches to 2%, then it is a positive sign or else it is negative (Auclert and Rognlie, 2018). This has been stated with two primary considerations

a. Monetarists: This segment believes that inflation could be controlled by the money supply and central banks. It could even be stated in a simple manner as

1. Suppose the inflation lacks behind its target, then the interest rate could be reduced which would make the loans heaper and thus, the supply of money in the market would increase. It would be accompanied by reduced savings, promotion to expenditures, and increase in consumption and investments which would accelerate inflation on a long term.

2. On the contrary when inflation is above target, interest rate could be increased and thus the results would be supportive to the economy.

The discussion on the inflation has been provided as the increase in the output due to the new technological innovations the output of the country has been increased which would impact the flow of the money in the economy. Thus, the flow of the money could be controlled through these measures in order to keep hold of the inflation rate. The new technological innovations would keep on accelerating the production level which would actually impact the flow of money and thus the measures could be applied for controlling it. There is an indirect link.

b. Keynesians: Along with the monetary policies, the fiscal policies of the government should be utilized; this is what is conveyed in Keynesian Model. This could be utilized through

1. If the inflation is below its target then the government could utilize its fiscal policies such as through increasing government expenditure or reducing taxes which would increase the supply and thus it would shift from ADS 1 to AS2 (Malmendier and Nage, 2015). This would provide with additional benefit of increase in the output that is from Y2 to Y3.

2. If the inflation rate is above target, the contradictory policies could be applied. .

The inflation is not impacting the technology, new technological innovation would impact the inflation rate as the output would be increased which would impact the flow of the money and hence the interest rate would be impacted. The fluctuation in the interest rate would impact the inflation rate.

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Impact of New Technology on Demand Curve

No, the technology that would impact the demand curve would be acknowledged. The autonomous driving could impact the demand curve of Ford Focus

Microeconomics

Assuming that the Ford Focus, is one of the first C-segment vehicle which has introduced the autonomous cars technology (Hansen, 2016). This is expected to have two different impacts on the demand curve.

The foremost effect would be that the vehicle would be accompanied by higher demand as the attractive and additional feature of the autonomous driving would attract huge number of customers with different tastes and preferences along with the increase in quality. It could also diminish the ownership, promoting car sharing such as services of Uber.

The inelastic supply curve would reflect that there would be no influence on the price of the product but there would be a shift in the demand curve due to the innovation of the new technology as this would attract huge customers. The increased demand would shift the demand curve to the right and thus, this would add on to the output of the economy. The increased output would be sold at the same price due to the inelastic demand and hence the new technological innovation would leave the price unaffected in the present scenario.

The decrease in the elasticity of demand has been observed to be exaggerated from QD1 to QD2. The increase in the production from QS1 to QS2, reveals that minor changes in the production that is from Q1 to Q2, impacts the price hugely that is from P1 to P3, when compared th more elastic curve that is QD1.

Here the impact of both the changes could be seen, that is the shift of the demand curve to the right as well as a decrease of the elasticity of demand which shifts the equilibrium from A to B (Labandeira et al. 2017). This reveals a positive situation which could be exploited by the firm with an increase in the production output from Q1 to Q2, till it reaches the condition where MR is equal to MC which has an additional benefit of price from P1 to P2.

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At point C, a new equilibrium would be achieved where the C- segment would enjoy the complete benefit of high demands at higher prices with higher output and revenue.

Macroeconomics

Taking on an assumption that the autonomous driving has taken up the main stream in all the C-segment vehicles. It could be estimated that considering the long run, the impact could be very disruptive to the society. The free time that the customers would gain would be utilized by them in other works and thus, the overall economy's production or output would be increased. I the Production Possibility Frontier language, a new curve would be seen on the right with the increase in the productivity that is the curve A2B2.

Now considering the Aggregate demand and Aggregate supply model where the aggregate demand increases with an increase in the consumption by households from AD1 to AD2. The shift also takes place due to increase in the investments by the firms for increasing the stocks, the government expenditure is also expected to increase with an aim to enhance public transportation and the exports would also increase for the developed countries. Thus, the entire ingredients would pull the demand curve up which would increase the output along with the inflation and hence the name, demand pulls inflation.

The shift of the output from Y1 to Y2 would impact the economy in a positive manner as increased output would provide more income to the economy and flow of money would increase. The increased inflation would depend on the criteria that it is moving towards or beyond the target inflation. In either case the monetarists and the Keynesian mechanism could be applied which would provide the economy a stability.

Conclusion

The economy has been impacted hugely by the new technology and it has been explored through the micro as well as macro point of views. The division of the two perspectives has helped in understanding the impact in a close and understandable manner. The impact of new technology would impact the supply curve through impacting the flexibility and the effectiveness of the technology while the demand curve would be impacted on the basis of the elasticity of the demand. The impact would be in favor of production as it would help in reducing the cost of production and hence increasing the products which would be entertained by the suppliers. The demand side would also be in favor of the technology as this would increase the production along with the increase in prices.

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