The Internet: How Is It

Changing the Economy?

Full Length Text — Part: 6 Special Topic: 2
Micro Only Text — Part: 4 Special Topic: 2
Macro Only Text — Part: 5 Special Topic: 2

To Accompany “Economics: Private and Public Choice 13th ed.”

James Gwartney, Richard Stroup, Russell Sobel, & David Macpherson
Slides authored and animated by:
Joseph Connors, James Gwartney, & Charles Skipton

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Use of the Internet

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Use of the Internet
• Use of the Internet has grown dramatically
since the early 1990s and is now a worldwide
phenomenon.

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 The Growth of the Internet
130 Millions of Internet Web Sites
120
110
100
90
80
70
60
50
40
30
20
10
0
1992 1994 1996 1998 2000 2002 2004 2006 2008
Source: www.zooknic.com.

• The number of Web sites rose dramatically between 1992

and 2008. By 2008, there were over 100 million Web sites.

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Who Uses the Internet?
Geographic Distribution of the Internet
Africa 3%
Asia 41% North
America 16%

Oceania/
Australia 1%

Latin
America 11%
Middle
East 3% Europe 25%
• About one-sixth of internet users live in North America.
• About a quarter reside in Europe.
• Two-fifths are in Asia.
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Economic Gains
from the Internet

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Potential Gains from the Internet
• Sources of economic gains from the Internet:
• Lower transaction costs.
• Broader and more competitive markets.
• Networking.

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Key Sectors
of Internet Growth

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Key Sectors of Internet Growth
• The Internet is now used extensively in
several consumer markets such as airline
tickets, books, music, and videos.
• eBay has revolutionized the market for
used consumer durables.
• The Internet is quickly transforming how
banking is conducted as the number of
households paying their bills online is
rapidly increasing.

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Key Sectors of Internet Growth
Internet Sales by Product Categories, 2007

Food 1%
Automobiles
3%
and Auto Parts
Sporting Goods 5%

Apparel 7%
Electronics
and Appliances 7%

Books 18%

Travel 23%
Computer hardware
and software 38%

• The share of sales conducted on-line exceeds 10% in the

travel, books, and computer hardware & software markets.
• The market share for on-line firms in the automobile, food,
and apparel markets is much smaller. Copyright ©2010 Cengage Learning. All rights reserved.
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More Efficient
Consumer Markets

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More Efficient Consumer Markets
• The Internet helps create value in final
product markets by either reducing sellers’
costs or improving the matches between
sellers and consumers.
• Improved efficiency in both production
and distribution have reduced costs.
• Matches are improved through better
information about available goods, greater
access to goods, and increased customization.

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More Efficient Input Markets
and Production Processes

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More Efficient Input Markets
• The ability of the Internet to improve
matches between buyers and sellers also
applies to business-to-business transactions.
• The Internet can lower transactions costs
between companies.

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Labor Markets
and the Internet

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Labor Market and the Internet
• The Internet is rapidly becoming an integral
part of the job search process.
• The reduction in the cost of information
through the Internet will tend to lower the
rate of unemployment and improve the
match between jobs and employee skills.
• The Internet also makes it possible for many
employees to work at home and at other
locations.

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Questions for Thought:
1. What impact does the Internet have on the
efficiency of markets? Explain. How is the
Internet likely to influence productivity and
the growth of output in the years immediately
ahead?
2. The share of airline tickets bought over the
Internet has grown rapidly, while the percent
of groceries purchased online remains
minuscule. What factors likely explain this
difference?

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Questions for Thought:
3. Many people now have fast broadband
connections to the web. Can you think of
product markets that have been substantively
impacted by this change?
4. How is the internet influencing the
production, marketing, and distribution of:
(a) popular music,
(b) movies,
(c) automobiles,
(d) commercial employment agencies,
(e) beautician services, and
(f) health care.
Briefly explain your response.
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 End
Special Topic 2

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