Technological Change

Advancement in technology leads to the production of the same output using fewer inputs. This phenomenon is known as total factor productivity enhancement.

The production function can be modified to accommodate technological change.

Here, 'A' shows the level of total factor productivity, which acts as a multiplier, increasing the rate at which any combination of inputs is capable of producing output.

A technological change can shift the isoquant.

For instance, a car manufacturer that produces a thousand cars introduces robotics, allowing it to make the same output with less labor and capital. This shifts the isoquant inward, signifying increased productivity.

However, some technological changes may affect one input more significantly than the other.

If the new technology enhances capital productivity more than labor productivity, the isoquant becomes flatter along a given ray from the origin, indicating that the marginal rate of technical substitution has decreased.

Real-life examples of these could be found in the U.S. manufacturing and agriculture sectors. The introduction of automation and robotics have transformed production, allowing U.S. consumers to benefit from increased output using the same capital and labor.