University of Michigan - Ann Arbor

In economics, technology is defined as the process of using a set of materials and other inputs, which include the labor of people and the use of machines, to produce an output.

Technology (Economic Definition)

Technological progress is a change in technology that improves production efficiency by reducing the amount of resources—such as labor, machines, land, energy, or time—needed to create a specific amount of output. This progress was the engine of the Industrial Revolution, leading to dramatic efficiency gains. For example, the time required to make a pair of shoes was cut in half within a few decades, with similar significant reductions in production time for activities like spinning, weaving, and factory-based production. This marked the start of a continuous revolution where production times for most products fell from one generation to the next.

Technological Progress

Which of the following best describes the role of technology in society?

Which of the following is an example of how technology has advanced the field of medicine?

Which of the following fields has been significantly impacted by advancements in technology?

What is a key characteristic of technology as described in the course?

The emerging stratification of society under the influence of digital technologies, evolving skill demands, and shifts in the nature of work.

Social Classes in the Digital Age

The Industrial Revolution is the term for the period of cumulative innovation that began in Britain during the 18th century. It is characterized by a wave of technological advances and organizational changes that transformed the economy from being primarily agricultural and craft-based to one centered on commerce and industry.

Industrial Revolution

The concept of technology in economics can be illustrated with cake production. One technology might be a traditional recipe that specifies inputs like flour and activities like manual stirring to produce a cake. A different technology could involve an industrial process using large-scale machinery, different ingredients, and machine operators to produce the same output. Both are considered distinct 'technologies' because they represent different processes for converting inputs to outputs.

Example of Technology: Cake Production

For millennia, olive oil was produced using simple, labor-intensive technologies. These historical methods were characterized by manual processes, such as using a pestle and mortar for mashing olives and heavy stones for pressing them. This approach required a substantial amount of human labor to transform a large quantity of raw olives, like 2,000, into a small amount of finished product, such as one liter of oil.

Example of a Labor-Intensive Technology: Traditional Olive Oil Production

Modern commercial olive oil production is a prime example of a technology that is both capital-intensive and energy-intensive. This approach is characterized by its reliance on a greater amount of machinery (capital) and power (energy) in comparison to traditional methods, which consequently reduces the need for labor.

Example of a Capital-Intensive and Energy-Intensive Technology: Modern Olive Oil Production

A production function is a graphical or mathematical expression that represents a specific technology. It describes the relationship between the quantity of inputs used in a production process and the maximum amount of output that can be produced. For instance, in an agricultural setting with a fixed amount of land, a production function can be plotted as a graph or written as a formula showing how the total grain output changes as the number of farmers (labor input) varies.

Production Function

A fixed-proportions technology is a production process that requires inputs to be used in specific, unchangeable ratios relative to each other. To increase the total output, all inputs must be increased by the same percentage to maintain these fixed proportions. Consequently, increasing the quantity of a single input while holding the others constant will not result in any additional output.

Fixed-Proportions Technology

A production technology is said to have constant returns to scale if increasing all inputs by a specific proportion results in the output increasing by that same proportion. For instance, doubling all factors of production will lead to a doubling of the total output, and a 50% increase in all inputs will yield a 50% increase in output. This characteristic of a production function is a key determinant of the shape of a firm's long-run average cost curve.

Constant Returns to Scale

A hypothetical robotic technology for producing olive oil is characterized by its specific input requirements and production properties. This system, operated by a single worker, consumes 400 kWh of energy to yield 100 liters of olive oil daily. It adheres to the principles of fixed-proportions technology and exhibits constant returns to scale, meaning that its daily output scales proportionally with the number of robotic systems installed.

Example of Robotic Olive Oil Production Technology

Based on the economic definition of a technology, analyze how the two methods described below represent two distinct technologies for producing a wooden chair. In your analysis, identify the key differences in the combination of inputs required for each.

Analysis of Production Technologies

A company that manufactures wooden chairs is considering several changes. From an economic standpoint, which of the following scenarios represents a change in the firm's production *technology*?

Analyze each production scenario and match it to the term that best describes its underlying technology, based on the dominant type of input required.

A manager at a furniture manufacturing company states: 'To increase our profits, we don't need to change *how* we make our tables. We just need to find a supplier who will sell us wood and screws for a lower price.' 

Critically evaluate this manager's statement. In your response, explain whether the manager's proposed strategy involves a change in the firm's production technology and discuss the potential limitations of focusing solely on input costs without considering the production process itself.

Evaluating a Firm's Strategy

From an economic standpoint, a firm that replaces its five-year-old delivery trucks with brand new, identical models has adopted a new production technology.

A bakery has always used a specific recipe and process to make 100 loaves of bread per day, requiring one baker, a standard oven, and a fixed amount of ingredients. The owner discovers a new kneading technique that allows the same baker, using the same oven and ingredients, to produce 120 loaves in the same amount of time. From an economic perspective, has the bakery's technology changed? Explain your reasoning.

Identifying a Change in Production Technology

Production technologies are categorized based on their relative use of different inputs. Common classifications include labor-intensive technologies, which rely heavily on human effort, and capital-intensive technologies, which depend more on machinery and equipment. Technologies can also be classified by other characteristics, such as their energy intensity or their requirement for fixed-proportion inputs.

Classification of Production Technologies

The common understanding of 'technology' focuses on physical items like machinery, equipment, and devices that result from scientific knowledge. In contrast, the economic definition is much broader, defining technology as the entire process by which inputs, such as materials, labor, and machines, are combined to produce an output.

Everyday vs. Economic Definition of Technology

A factor of production is any resource or input used in the process of creating goods or services. Key categories of these inputs include labor (human effort), capital (machinery and equipment), land, energy, and raw materials.

Factor of Production (Definition)

A production function is a graphical or mathematical description of a technology, defining the relationship between the quantities of inputs used in a production process and the maximum amount of output that can be produced.

Production Function (Definition)

A fundamental decision for any firm is selecting its production technology. This choice determines the specific process the firm will use to transform inputs, such as materials, labor, and machinery, into the final output it intends to sell.

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