Chapter 3. Building The Theory of Technological Evolution Upon the Foundation of General Equilibrium Theory.

Abstract

Existing firms, with fixed production on the plant floor and fixed inputs, are on a pathway to extinction because, in perfect competition, new firms, with new production equipment, and less labor used in production, produce the good more cheaply and sell at a cheaper price, a sequence of events which continually eats the profits of the existing, incumbent firm.

At the moment that the new firm enters the market, their production technology to produce good x1 represents the very best, least cost method of production.

The new firm’s production technology becomes the new competitor to beat, in terms of costs, and acts as an attractor, or reference point, for all other firms that are adapting their own production to the new environment.

In order to compete with the best practice production technology, managers of firms with average technology may choose to cut variable costs, the most likely candidate being labor costs.

Other firms, with older production technology may not be able to catch up, technologically, with the new best practice.

The senior management in those firms may choose to cut costs down to average total costs, so that they can at least cover their variable costs as they cope with their declining sales and declining profits.

Keywords: technology evolution, equilibrium theory, hopf bifurcation

JEL Classification: L1 - Market Structure, Firm Strategy, and Market Performance