Explain how new technologies, which increase productivity, affect the average variable cost, average total cost, and marginal cost curves

Question

What will be an ideal response?

Answer 1

A technological change that increases productivity shifts the total product, average product, and the marginal product curves upward. Because the new technologies enable existing inputs to produce more output, this effect means that the average variable cost, average total cost, and marginal cost curves shift downward, reflecting the decrease in average and marginal costs. However, the new technologies often need to use more capital and less labor. In this case, the firm's fixed cost increases and its variable cost decreases. The increase in fixed cost leads to an increase in total cost while the decrease in variable cost leads to a decrease in total cost. Although the net effect is ambiguous, generally the total cost increases at low levels of output and decreases at higher levels of output. In this case, the average total cost curve shifts upward at lower levels of output and shifts downward at higher levels of output.