6.19 : Technological Change

Total Factor Productivity (TFP) measures the efficiency with which inputs are transformed into outputs in production. It is the essence of economic growth, driven by technological advancement. Consider the agricultural sector, where production requires vast amounts of human labor and work animals. Today, modern farm machinery and agriculture technologies have revolutionized how we cultivate crops and produce food much more efficiently.

TP = A*f(K, L)

TFP is represented as a multiplier 'A' in the production function, indicating output achievable from given inputs beyond what is directly attributable to input quantities.

Technological progress can affect production in two main ways:

Shift in the Isoquant: The introduction of more efficient machinery in agriculture, like GPS-guided tractors, leads to higher output with the same or fewer inputs, causing an inward shift of the isoquant curve.

Change in the Convexity: If a technological advancement disproportionately increases the productivity of one input over another, the isoquant curve might become more convex to the origin. This change reflects that the MRTS between the inputs has been altered, but the isoquant remains downward-sloping. Consider the healthcare sector, where digital record-keeping technology significantly reduces the need for administrative labor while having little impact on the demand for medical staff. This technological advancement makes the isoquant more convex towards the origin, reflecting greater productivity in administrative tasks. This change in the isoquant's shape indicates that administrative labor has become more efficient, altering the optimal mix of inputs in the production process.

These changes in isoquants due to technological progress illustrate how innovations can alter the optimal mix of inputs and overall production efficiency. Understanding these effects is crucial for firms to adapt their production strategies and maintain competitiveness in evolving markets.