Changes in production technology: technical advances

3.6.2 Changes in production technology: technical advances

In our discussion of substitution possibilities, production technology, T, was assumed to remain constant. In other words, factor substitution possibilities were analyzed assuming no change in the current techniques (or state of the art) of production. However, in a dynamic economy, technological advance that entails a fundamental change in production techniques is a normal experience. If this is the case, it will be instructive to address the following three related questions:

1 In what specific ways does a change in production techniques affect the use of factors of production?

2 Are all factors of production equally affected by a change in production techniques?

3 What exactly are the broader implications of changes in production technology for the issue of natural resource adequacy (scarcity)?

The effect of a change in production techniques, T, is shown using two isoquants in Figure 3.10 . Note that both isoquants are assumed to represent the production of the same level of output, Q 0 . The isoquant further to the right represents the various combinations of a natural resource and other factors of production (capital) used to produce the given level of output, Q 0 , prior to a change in technology. After the technological change, the same isoquant has shifted downward, implying no change in the level of output produced. What we can conclude from this is that, with technological change of this nature, the same level of output can be produced by using less factors of production. For example, as shown in Figure 3.10 , before

the change in technology it used to take amounts N 0 and K 0 of natural resource and other inputs, respectively, to produce the output level Q 0 . With the implementation of the new techniques of production, the same level of output can be produced using amounts N 1 and K 1 of the two factors of production. Viewed in this way, technological advance in production techniques entails resource conservation.

In Figure 3.10 , the isoquant is assumed to shift downward but remain parallel. Thus, along any intersection of these two isoquants and a straight line from the origin, such as points A and B, the slopes of the isoquants will be identical. As we have discussed earlier, the slope of an isoquant is a measure of substitution possibilities between two factors of production. Furthermore, it can be easily demonstrated that the slope of an isoquant is also a measure of the relative productivity of two inputs. To see these alternative interpretations of a slope of an isoquant, suppose that in Figure 3.10 , at the input combination represented

MARKETS, EFFICIENCY, TECHNOLOGY 47

Figure 3.10 Advances in production techniques

by point A, the slope of an isoquant is −2.0. This tells us that at this particular level of usage of natural resources and capital, it takes 2 units of capital to substitute a unit of natural resource. On the other hand, if it takes 2 units of capital to substitute a unit of natural resource, then the natural resource must be twice as productive as capital. Thus, the slope of the isoquant can be used in this way to inform us about the relative productivity of the two factors of production. In Figure 3.10 the parallel downward shift of the isoquant has no effect on the slope of the isoquant. Hence, the relative productivity of natural resource (N) and other factor inputs (K) are not affected by a technological advance of this nature. This represents a case of what economists call an unbiased (or a neutral) technological change.

However, technological changes are seldom unbiased. In other words, technical advance in production technology often enhances the productivity of one input in a disproportionate manner. When this happens, the new isoquant will not be parallel to the old.

In Figure 3.11a , the technological change is capital, K, biased. To see this, we note that as a result of the technological change, the isoquant shifted downward. But the new isoquant appears to be flatter, as compared to the isoquant before the change. Thus, the slope of the new isoquant along any given ray from the origin (i.e., constant input ratio) is smaller than the slope of the original isoquant along this same ray. For example, the slope at point R is less than that at point S. A decrease in the slope of the isoquant in this case implies a decrease in the rate at which K needs to be increased (sacrificed) in order to accommodate for a small reduction in natural resources to produce a given level of output. For example, as shown in Figure 3.11a , assume that, due to technological change, the slope of the isoquant was reduced from −3 at point S to −2 at point R. In this situation, before technological change, if the use of natural resource input (N) is reduced by a unit, the use of capital has to be increased by 3 units in order to maintain the production

of the same level of output, Q 0 . However, after the technological change, a reduction of natural resource usage by a unit can be compensated for by only 2 (not 3) units of capital. Thus, technological change must have enhanced the productivity of K more than N. This is the reason why such a technological change would be identified as capital biased. It is important to note here that by reducing the opportunity cost of natural resources in terms of other resources, although indirectly, a capital-biased technological change has the effect of ameliorating the impact of natural resource scarcity.

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Figure 3.11 Biased technological advances

Finally, using a similar argument to that above, it would not be difficult to show that the case depicted in Figure 3.11b represents a technological change that is natural resource biased. Given that the level of output produced remained unchanged at Q 0 , this type of technical advance would clearly lead to conservation (less use) of natural resources. Consider, for instance, the production of technological change from the standard incandescent lightbulb. Compact fluorescent bulbs are a technological change that reduces energy (resource) use for a given amount of light. This is an improvement when compared with halogen bulbs, which use more energy to provide the same amount of light.

From the discussion in this section it should be clear that the scarcity (availability) of natural resources cannot be adequately addressed without careful consideration of technological factors such as factor substitution possibilities and technical advances in production. According to the standard economic paradigm, as will be evident from the discussion in Chapter 8 , consideration of this issue is central to any attempt to assess the impacts of natural resource scarcity on future standards of living.