This document is a resume of the class 'IT Economics', the second set of lectures of the course 'IT Modeling & Economics', taught by professor Van Droogenbroeck. It was written based on the slides, the book by Varian and my lecture notes.
Chapter 1: The Internet boom
1. Waves of innovation
a. Four waves of innovation
- The industrial revolution in Britain (1780s to the 1840s) fuelled by steam power
- The railway age (1840s to the 1890s)
- Electric power (1890s to the 1950s)
- The information age (now). Information technology has the power to transform every
major sector in the coming years.
b. Alternative view
In some literature, there are only three waves being described:
- First industrial revolution in Britain (18th century)
- Second industrial revolution: moving assembly line by Henry Ford (20 th century)
- Third revolution: manufacturing is going digital
c. Combinatorial innovation
A technology emerges a rich set of components that can be combined and recombined to
create new products and initiate a technology boom.
These inventions tend to appear in clusters. There are different explanations for this:
- Demand side: the social resistance is lowered.
- Supply side: innovators work with the same components which makes near-
simultaneous invention quite common.
- Complements are developed via indirect network effects.
But the internet revolution is much faster than previous revolutions because the components
are no physical devices, but just bits. There are no delays in manufacturing, no shipping
costs, no inventory problems, etc. Online services and design software make it easy to
develop and share digital blueprints.
It is often said that we are now in a quiet phase and the next 50 years will bring the largest
technological changes and innovations we have ever seen in our work and leisure.
2. The new economy
The best way to analyse the impact of the Internet on the economy
is as a fall in the cost of an input (information). This pushes the
aggregate supply curve out to the right, just like the invention of
the wheel or electricity. Assuming no change in aggregate
demand, the equilibrium level of production rises from Q 1 to Q2 and
the price level falls from P1 to P2.
The current economic situation is often referred to as the ‘new
economy’ that needs new economic rules. Many economists argue
that this is not true: technology changes but economic laws do not.
There is nothing new about these economic forces: the forces that
were minor in the industrial economy just turn out to be critical in
the information economy. The ‘old economics’ principles still work
remarkably well.
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