Many changes in technology are based on scientific discoveries made in
such non-profit organizations as universities and government research
laboratories; others come out of laboratories run by private firms.
Whatever their origin, most technological advances are put into practice
by firms in search of profits. A firm that first develops a new product, a
new wrinkle on an old product, or a new process that lowers production
costs gets a temporary advantage over its competitors. This advantage
creates profits that persist until others can copy what the original firm has
done. In the very long run, the search for profit takes the form not just of
choosing the most efficient technique among known alternatives but also
of inventing and innovating new products and processes. Since firms do
this in search of profits, we say that the technological change is
endogenous to the economic system rather than something that just occurs
for unknown reasons.
Sometimes innovations come from new ideas that are the next extension
of existing knowledge, where the motivation is to raise profits by
developing these opportunities. Examples include new apps for
smartphones or new services in cloud computing. At other times
innovations are a response to some obvious challenge. For example,
rising fuel prices and the growing recognition of problems associated with
the burning of fossil fuels have led to a rapid development of all-electric
vehicles and the battery technology necessary to make them effective
substitutes to gasoline-powered cars.
Consider three aspects of technological change: new techniques, improved
inputs, and new products.