Economics · Ch 10 — The Theory of the Firm under Perfect Competition
Technological Progress
Technological Progress
The Meaning of Technological Progress
When a firm introduces a technological improvement — whether through a new production technique, better machinery, or an organisational innovation — the relationship between inputs and output changes. The textbook gives a concrete example: suppose a firm uses capital and labour to produce a good. After an organisational innovation, the same quantities of capital and labour now produce more units of output than before.
Another way to see this is from the input side. To produce a fixed level of output — say, 100 units — the firm now needs fewer units of capital and labour. In either case, the firm's production process has become more efficient.
Effect on Marginal Cost
This improvement directly affects the firm's cost structure. Because the firm can now produce each additional unit with fewer inputs, the cost of producing that extra unit — the marginal cost — falls. At every level of output, the marginal cost is lower than it was before the innovation.
Technological progress causes the entire marginal cost curve to shift rightward (or downward). At any given quantity, the MC is lower; equivalently, for any given MC value, the firm can now produce a larger quantity.
Shift of the Supply Curve
Recall that under perfect competition, a firm's supply curve is exactly that portion of its marginal cost curve which lies above the average variable cost curve (the shutdown point). Since the MC curve shifts rightward, the supply curve — being a segment of the MC curve — also shifts to the right.
A rightward shift of the supply curve means that at any given market price, the firm now supplies more units of output than it did before the innovation.
This is the central result: technological progress increases the quantity supplied at every price, because production has become cheaper per unit.
A Numerical Illustration (to make the mechanism concrete)
The textbook does not provide a specific numerical example in this section, but the logic is straightforward. Suppose before the innovation, at a market price of ₹100, the firm's MC curve indicated that it would produce 50 units. After the innovation, the MC at 50 units is lower than ₹100. To find the new profit-maximising output, the firm will expand production until MC again equals ₹100. Because the MC curve has shifted down, this equality now occurs at a larger quantity — say, 70 units. So at the same price of ₹100, the firm supplies 70 units instead of 50.