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.