Unit ONE

Managerial Economics Basic LH [3] Hrs

1.1 Defining moments of economics: from Industrial
revolution to Information revolution
1.2 Technological change in a global economy
1.3 Market failure, Externalities and Public goods
INFORMATION REVOLUTION VS. INDUSTRIAL REVOLUTION
As e-commerce became all the rage in the late 1990s and as
the Internet, World Wide Web, and other information technologies rapidly
transformed the economic and social environment, many analysts,
journalists, and scholars took the time to reflect upon the current
transformations and breakthroughs and situate them in a broad, historical
context. The fruit of these labors was the conception of the current era as the
Information Revolution, akin in its historical importance and impact to
previous economic revolutions, particularly the Industrial Revolution.
The attempts to theorize a new economic and social era—particularly one
whose effects have yet to be fully realized—inevitably generated widely
disparate definitions and characteristics of the Information Revolution, not
to mention predictions, prescriptions, and levels of enthusiasm. Several key
questions arise: Does the Information Revolution in fact constitute a
historical epoch on a par with previous revolutionary transitions? What are
the comparative features and effects of the Information Revolution and the
Industrial Revolution? How did the Industrial Revolution alter previously
existing conceptions of economics, social organization, the nature of work,
cultural patterns, and so on? What needs to be done to either take advantage
of the benefits of the Information Revolution, or—if one is of a different
theoretical persuasion—what steps must be taken to mitigate its worst
effects?
 Since even the most enthusiastic proponents of the Information Revolution
agreed that, in the early 21st century, the new era was still in its infancy, it
remained to be seen whether the Information Revolution would truly
revolutionize society on a scale comparable with the Industrial Revolution,
which produced greater change in just two centuries than occurred in the rest
of human history combined.

Technological change in the global economy

Changes occur so rapidly in modern society that people find it difficult to adapt to their evolving
environment. He argued that the average person is emotionally and intellectually left behind by
the rapid pace of technical and cultural change.
Faced with rapid change, many firms have found it difficult to keep pace. Complicating the
situation is the need for firms to stay abreast of new developments within their own industry

• Electronics companies must be competitive in using the new digital technologies for their
audio and video equipment.
• Automobile manufacturers survive only if they keep costs down by using advanced
robotics for assembly.
• Computer suppliers can stay profitable only if their machines include state-of the-art chips,
display terminals, and storage devices.

Impact of technological change

• Technological change may involve new products, improvements or cost reductions for
existing products, or better ways of managing the operations of a business.
• May be simple or brilliant.
• Technological change can be thought of as altering the firm’s production function.

Neutral Technological Change

• Can cause a shift in the production isoquants.
• Equal reduction in both inputs.

Non-neutral Technological Change

• increases the marginal product of capital relative to the marginal product of labor.
• Unequal reduction in one of input.
 Technological Change, Productivity and Economic Growth.

• Productivity = output / inputs

• Labor productivity- output divided by the quantity of labor.
• Technological change is an important source of increased labor productivity.
• Total factor productivity compares changes in both capital and labor.
• E.g. Automobile Production in England and Germany.

Technological Change and the market Structure

What type of market structure best facilitates the generation of new knowledge?

Does the market structure determine the rate of technological change or does the nature of
technology dictate which market structure will prevail?

Effect of market Structure on Technological Change

• Market power is a necessary condition for rapid technological change.

• Large firms have been responsible for many important developments.
– E.g. AT&T’s Bell labs devised the transistor and DuPont introduced Nylon.
• Small firms also have impact (competitive)
• In evaluating the effect of market structure on technological change, the key is to consider
both the ability and the incentives to be progressive.
• Ability involves being able to fund expensive R & D projects, withstand failures, and wait
for results.
• Incentives include the need to remain competitive and being able to capture the rewards of
technological advance
• Market structure can affect the rate of technological change
• Technology can also significantly affect the structure of market.
– e.g. Telecommunication.
• Changes in technology, by reducing or increasing economies of scale, can alter market
structures.

Industrial Innovation

• Invention, Innovation and diffusion.

• Invention can be thought of as a creation of new ideas.
• Innovation represents taking those ideas and transforming them into something that is
useful for society.
 • Diffusion is the process whereby the new product or process becomes available throughout
the society

Market Failure

Market failure does not mean that the given market has ceased functioning. Instead it is a
situation in which given market does not efficiently organize production or allocate goods
and services to the consumers.Competitive markets fail for four basic reasons:
– Market power
– Incomplete information
– Externalities : The effect of production and consumption activities not directly
reflected in markets.
– Public goods: goods that benefit all consumers

“Explain externalities and public goods and how they affect efficiency of market outcomes.”
Reference: Gregory Mankiw’s Principles of Microeconomics, 2nd edition, Chapters 10
and 11.

Public Goods: Examples

The classical definition of a public good is one that is non-excludable and non-
rivalrous. The classic example of a public good is a lighthouse. A lighthouse is:
Nonexcludable because it’s not possible to exclude some ships from enjoying the
benefits of the lighthouse (for example, excluding ships that haven’t paid anything
toward the cost of the lighthouse) while at the same time providing the benefits
to other ships; and
Nonrivalrous because if the lighthouse’s benefits are already being provided to so
me ships, it costs nothing for additional ships to enjoy the benefits as
well. This is not like a “rivalrous good,” where providing a greater amount of the
good to someone requires either that more of the good be produced or else that
less of it be provided to others – i.e., where there is a very real opportunity cost o
f providing more of the good to some people.
Some other examples of public goods: and television:
Today no one who broadcasts a radio or TV program “over the air”
excludes anyone from receiving the broadcast, and the cost of the broadcast is un
affected by the number of people who actually tune in to receive it (it’s no
rivalrous). In the early decade of broadcasting, exclusion was not technologically
possible; but technology to “scramble” and descramble TV signals was invented s
o that broadcasters could charge a fee and exclude nonpayers. Scrambling techn
ology has been superseded by cable and satellite transmission, in which exclusion
is possible. But while it’s now technologically possible to produce a TV or radio
signal from which nonpayers are excluded (so that it’s not a public good), it’s imp
ortant to note that because TV and radio signals are nonrivalrous, they are techno
logically public goods: it’s technologically possibleto provide them without
excluson.
The thermostat setting in a room: The temperature in our seminar room, 401KK
– or in a shared office, or in a home – is the same temperature for all who occupyt
he room. We can’t make it warm for some and cool for others.
Police protection; national defense: National defense can’t be provided at differ
ent levels to different citizens. Similarly for the level of police protection in a com
munity, but police protection (unlike national defense)
is subject to congestion: a larger population requires a larger police force to provi
de the same level of protection.

Books: Consider the information in a book. After the information has been produ
ced (i.e., once the book has been written), it needn’t be written again in order for
additional people to read it. So in this respect, a book is non
rivalrous. But until recently there was still a significant
cost to making the book available to additional readers: additional copies of the
book had to be printed, bound, and delivered, and all these steps required resour
ces (a marginal cost) for each additional copy of the book. So the public-
good character of a book (the non-
rivalrous information it contained, i.e., the writing) was outweighed by its private-
good character, the marginal cost of producing each additional copy of the physic
al book. But this has completely changed: today it’s possible, once a book has be
en written, to distribute unlimited copies electronically at essentially zero margina
l cost. So today a book is a public good – i.e., like a TV broadcast, a book is techno
logically a public good, but to the extent that exclusion is possible, in
practice the book may or may not be a public good in any particular case.
Information; “content”: Everything we said in the preceding paragraph about bo
oks is equally true for recorded music, movies, newspapers, magazines – for what’
s today often called “content.” In the not-
verydistant past, it was costly to manufacture and distribute additional
copies of any particular content, such as a CD or videotape or magazine.
But today, once the fixed cost of creating the content has been incurred, the mar
ginal cost of making that content (information) available to additional people is es
sentially zero.