2.4, modelling a dynamic economy technology and costs.
This section asks a very important question:
what is a technology? The most common mistake about technology
is that it is a machine, it's an industrial robot in a BMW
factory, or it's a tractor in a farm. No. Technology includes machines but goes
beyond it. Technology here refers to different
ways of producing the same thing. Let's assume we want to produce 100
meters of cloth. Now in real worlds firms, depending
on the country or the region that they're located in,
use different ways of producing cloths.
Let me give you some real world examples. This is a highly automated textile
factory. As you can see, there are only two people working there,
and you have an expensive machinery that consumes a lot of energy. We call this
way of producing cloths an energy-intensive or capital-intensive
way of production. Now, how do we represent
the energy-intensive technology you've seen
in the movie in a graph? Let's scroll down here.
Here let's represent the technologies on the basis of two factors: the amount of
energy they use - here we have an example of tons of coal,
you can replace it with kilowatt of electricity or barrels of oil - so the
y-axis is the energy that the technology uses; the x-axis is
the number of workers and we can represent an energy-intensive
technology in this way, A. The factory that I just showed you
here, for producing hundred meters of cloth needs
six units - six tons of coal and only one worker. We call this, as I showed you, an
energy-intensive technology, an-energy intensive
way of producing hundred meters of cloth. Now technology P produces the same
amount of cloth - hundred meters, but it uses less energy
and more number of people compared to A. Let's see a real world example of
technology B. In this factory, you see a higher number
of people but a less sophisticated technology, a less
automated way of producing cloth, and less amount of energy consumption. We can
think of other technologies that can produce the same amount of cloth like
C, D, or E, but let's focus on E. We call this a labor intensive
technology, why? Because for producing hundred meters of cloth
E is using a lot of people, but very low amount of energy.
A real world example is this - this way of producing cloth does not require a
sophisticated technology, does not require a lot of energy, it's
actually the way we used to produce cloth before the industrial revolution,
but to produce a hundred meters of cloth in
this way you're gonna need a lot of workers, so it's a very labor intensive
technology. If we go back to our graph we should
bear in mind that all these five technologies, A, B,
C, D, E produce the same amount of output - that is hundred meters of cloth.
Now the question is thatL which of these technologies is superior to the
others? And for that we need to scroll down
and have a deeper look. If we do that, we realize that technology A dominates
technology C, why? Because technology A produces the
same amount of output as technology C,
but with a lesser number of people and lower amount of coal. In other words
technology A is the more advanced or more
updated version of technology C.
If you look here, we also realize that technology B
dominates technology D because it produces the same amount of output - 100
meters of cloth, but with less of both factors of
production. Technology E doesn't dominate anything,
so at a more careful look, we realize that
the main choice of technology here is between A,
B and E. Technology D and C don't matter because they are the
outdated version of already existing technologies.
So the real choice, as I said, is between A, B,
and E. Now the most important question is that: as
a firm, which of these technologies would you choose?
And that really depends on the relative cost of labor
to the cost of energy in your country or in your region.
If you're a firm based in a country or region where the relative cost of
labor is low relative to the cost of energy, then
it would definitely make sense for you to go for a labor-intensive technology.
That technology is the most profitable way of producing cloth in
your country or region or if you're located in a country where
the wages are high but the cost of energy is low.
Then it would make sense for you to go for technology A,
that would be the most profitable technology. I'm going to talk
more about the cost of production in the next video.
Thank you.