For example, how long did it take for the market to adjust the price of automobiles relative to horse drawn carriages, so that their price/benefit ratios were the same.
Similar questions apply to steam engines, electricity, digital computers, the internet and so on.
This question relates to the question of how long it takes for stocks in a broad based ETF fund to reflect market conditions?
What are books and articles that discuss this?
Hello Robert Shour
The answer to your question depends on several factors, such as the nature of the technology, the degree of competition, the elasticity of demand and supply, and the presence of market frictions or regulations.
One way to approach your question is to use the supply and demand framework, which is a model that describes how prices are determined by the behavior of consumers and producers. Prices adjust to equilibrate the two sides of the market.
In general, when a new technology is introduced, it tends to have a higher price than the existing technology, because the supply is limited and the demand is high. Over time, as more firms enter the market and compete, the supply increases and the price falls. The demand may also decrease as consumers become more aware of the benefits and drawbacks of the new technology. The price will continue to fall until it reaches an equilibrium point where the quantity demanded and supplied are equal.
However, this process may not be smooth or fast, depending on various factors that can shift the supply or demand curves or create disequilibrium in the market. For example:
- A change in production costs can affect the supply curve. If the costs of producing a new technology increase due to inflation, scarcity of inputs, or taxes, the supply curve will shift to the left, meaning that less quantity will be supplied at each price. This will create a shortage at the original price and push the price up until a new equilibrium is reached.
- A change in consumer preferences can affect the demand curve. If consumers become more interested in a new technology due to advertising, innovation, or social trends, the demand curve will shift to the right, meaning that more quantity will be demanded at each price. This will create a surplus at the original price and push the price down until a new equilibrium is reached.
- A market intervention can create a price control that prevents the market from reaching equilibrium. For example, if a government imposes a price ceiling on a new technology that is lower than the equilibrium price, this will create a shortage because the quantity demanded will exceed the quantity supplied. This may lead to rationing, black markets, or inefficiency.
Therefore, there is no definitive answer to how long it takes for technology prices to equilibrate. It depends on how quickly and effectively the market responds to changes in supply and demand conditions. Some technologies may take longer than others to reach equilibrium due to various factors that affect their production and consumption.
Some books that discuss this topic are:
- Mankiw, N.G., Principles of Economics (9th edition), Cengage Learning (2020).
- Romer D., Advanced Macroeconomics (5th edition), McGraw-Hill Education (2018).
- Varian H.R., Intermediate Microeconomics: A Modern Approach (9th edition), W.W. Norton & Company (2014).
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