Effect of change in Technology on the supply curve of the firm.

 

 

Learning Contents:                                                            

·            Impact of adopting a new or advanced technology on the supply of the firm.

·            Impact of continuing with an old or outdated technology on the supply of the firm.

Technological improvements transform the way goods are usually produced and consumed. With technological improvements, firms can create new, innovated or improved goods and services which not only will increase firm’s production or supply but profits too. In simple words, firms can increase the supply of goods and services by using the updated technology. Therefore, the supply of the firm is positively related to the state of technology. Similarly, consumers are also equally benefitted from the technological improvements. They consume and experience better goods and services at reasonable prices, whereas, any degradation of technology not only deters the firm’s profits and supply but also affect the way consumers consume and experience the goods and services. Hence, the impact of what kind of technology a firm adopts on its supply curve can be understood into two categories as below:

1. Impact of adopting a new or advanced technology on the supply of the firm.

As we know that, modern technology is critical to the success of the firms. A firm investing in an advanced or improved technology will not only reap the benefits of production efficiency i.e. Large- scale production at low cost. Similarly, a firm using advanced technology can attract new customers that further will increase the demand of goods and services by the consumers and thus, shifts the firm’s supply curve towards right. Online shopping companies, Banking institutions, Educational institutions, Electronic appliances producers, etc. are some examples where the positive impact of technology is seen on the supply of the firms. 

Explanation:

At constant price, the effect of the adoption of new technology on the supply of the firm is shown in Figure 1.1. The quantity supplied is shown on X-axis and the price on Y- axis. S₀ is the initial supply curve and S₁ is the final supply curve. When price is kept constant, an adoption of improved technology by the firm leads to an increased production of goods and services causing quantity supplied to increase from OC₁ to OC₂ and therefore, supply curve shift to right from S₀ to S₁. This forward shifting of the supply curve is called an increase in supply.

2. Impact of continuing with an old or outdated technology on the supply of the firm.

A firm is less likely to succeed if it operates on outdated or complex technology. It lowers down the firm’s productivity and increases its cost of production and eventually reduces the profit margins. Similarly, consumers also suffer due to old or outdated technology. They are forced to consume outdated goods and experience the poor services. An important point to note is that firms won't be able to adopt modern technologies if running out of sufficient funds . Hence, their supply curve shifts to the left. For example - Some Bricks producers, Ceramic Tile producers, Gold vendors, etc. are still dependent on the use of outdated technology leading to their low output and low profits.

Explanation:

At constant price, the impact of using an outdated or obsolete technology on the supply of the firm is shown in figure 1.2. The quantity supplied is shown on X-axis and the price on Y- axis. S₀ is the initial supply curve and S₁ is the final supply curve. When price is kept constant, a firm operating on outdated technology leads to decreased production of goods and services causing quantity supplied to decrease from OC₁ to OC₂ and supply curve shifts to the left from S₀ to S₁. This backward shifting of the supply curve is called a decrease in supply.

We summarize this by saying that state of technology and supply of goods and services are positively related to each other.

 

Choose the correct answer based on the above learning

1. Which of the following will shift the supply curve for good X leftward?

a. a technological improvement in the production of X.

b. Fall in the price of X.

c. Rise in the price of X.

d. a technological degradation in the production of X.

2. The supply curve shifts________, when there is a technological____________.

a. left; improvement.

b. rights; degradation.

c. constant; improvement.

d. right; improvement.

 

3. An increase in technology for producing personal computers leads to

a. an increase in the demand for personal computers.

b. a decrease in the demand for personal computers.

c. an increase in the supply of personal computers.

d. a decrease in the supply of personal computers.

 

4. Which of the following statement is incorrect about the technology improvement?

a. Improvement in technology leads to reduced production.

b. Improvement in technology leads to increased production.

c. Improvement in technology leads to reduced cost of production.

d. Improvement in technology leads to good customer experience.

Answer Key:

1.d

2.d

3.c

4.a

 

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