AQA Specification focus:
‘Technological change can lead to the development of new products, the development of new markets and may destroy existing markets; technological change can influence the structure of markets; students should understand how the process of creative destruction is linked to technological change.’
Technological change reshapes industries by creating new opportunities and destroying outdated structures. It affects production, markets, and industry competition through innovation and creative destruction.
Technological Change and Market Dynamics
Technological change refers to the application of new knowledge, inventions, or innovations in ways that alter production processes, consumer behaviour, and market structures. It may emerge as:
Product innovations (new or improved goods and services).
Process innovations (new methods of production or distribution).
These changes often increase efficiency, reduce costs, or create entirely new products and industries.
Development of New Products
Technological progress allows firms to introduce novel goods and services that can meet consumer demands more effectively or stimulate new demand. For example, the invention of the smartphone did not merely replace previous mobile phones; it expanded consumer expectations, creating markets for apps, digital media, and online services.
Key implications of new product development include:
Expanded consumer choice.
Increased firm revenues through first-mover advantage.
Pressure on competitors to innovate or risk losing market share.
Development of New Markets
Technological change also fosters the emergence of entirely new markets. These may be:
Geographical markets (global e-commerce allowing firms to reach international consumers).
Sectoral markets (digital platforms, renewable energy, biotechnology).
Firms that exploit technological breakthroughs often capture new demand, reshaping competitive landscapes. For instance, the growth of streaming platforms disrupted traditional DVD and television markets.
Creative Destruction
Creative Destruction: A process, described by economist Joseph Schumpeter, whereby innovation continuously revolutionises economic structures, creating new industries while destroying or reshaping old ones.
Creative destruction explains why some firms and industries decline while others emerge stronger.
Mechanisms of Creative Destruction
Creative destruction operates through several interconnected mechanisms:
Displacement of outdated products: New goods make older products obsolete.
Reallocation of resources: Labour and capital shift from declining industries to growing ones.
Restructuring of firms: Companies adapt production methods or exit the market.
Market structure evolution: Barriers to entry and competitive conditions are altered.
Influence on Market Structure
Technological change and creative destruction affect market structures in several ways:
Increased Competition
New entrants exploit innovation to challenge established firms.
Barriers to entry may fall as digital technologies reduce fixed costs.
Market Concentration
Alternatively, innovation can lead to dominance by a few firms, particularly where economies of scale and network effects prevail (e.g., big tech platforms).
Shifts in Industry Life Cycles
Industries move through stages:
Emergence (created by innovation).
Growth (expansion of demand).
Maturity (intense competition).
Decline (obsolete products replaced by newer alternatives).
Technological change accelerates these cycles, forcing firms to adapt quickly.
Implications for Firms
Firms must strategically respond to technological change and creative destruction to survive and grow.
Opportunities
Lower costs through process innovations.
Higher revenue from new products.
Potential for global market expansion.
Risks
Obsolescence of existing products.
Erosion of market share if competitors innovate faster.
High research and development (R&D) costs without guaranteed returns.
Barriers to Entry and Industry Restructuring
Technological change interacts with barriers to entry:
Reduced barriers: Online platforms and digitalisation allow small firms to enter markets more easily.
Increased barriers: Large firms may strengthen dominance by securing patents, controlling data, or achieving economies of scale.
This influences industry structure, shaping whether markets become more competitive or more concentrated.
Case Examples in Economic Context
Creative destruction in retail: E-commerce giants disrupted high-street shops, shifting consumer spending online.
Transport innovation: Ride-hailing apps disrupted traditional taxi markets by lowering barriers and offering technological convenience.
Energy sector: Renewable energy technologies are displacing fossil fuel-based power generation, transforming global energy markets.
These examples illustrate the dual impact of technological change: growth for innovators and decline for traditional firms.
Summary Points for AQA Focus
Technological change leads to new products and markets.
It may destroy existing markets, a process known as creative destruction.
Market structures are reshaped, influencing competition, entry barriers, and firm survival.
Understanding these dynamics is essential for analysing real-world industrial change under the AQA A-Level Economics syllabus.
FAQ
Creative destruction is more disruptive than ordinary competition because it replaces entire industries or business models rather than just shifting market share.
For example, supermarkets competing on price is standard competition, but online retail eliminating the need for many physical stores is creative destruction. The difference lies in the scale of transformation and the permanence of the market shift.
Consumer preferences accelerate creative destruction by rewarding innovation.
Demand for convenience drove the success of streaming over DVDs.
Eco-consciousness has boosted renewable energy adoption over fossil fuels.
Shifts in digital lifestyles have favoured app-based services over traditional providers.
Without consumer uptake, even disruptive technologies would struggle to reshape industries.
Although it causes short-term disruption, creative destruction reallocates resources to more productive uses.
Labour moves into innovative industries.
Capital is reinvested in new technologies.
Productivity improves as outdated methods are replaced.
This process sustains long-term growth by keeping economies dynamic and adaptable.
Yes, in the short run. Workers in obsolete industries may lose jobs when innovation eliminates demand for their skills.
However, over time, new industries typically create alternative employment opportunities. The challenge lies in retraining workers and ensuring they transition successfully into emerging sectors.
More competitive: When innovation lowers entry barriers (e.g. digital platforms allowing small firms to enter).
Less competitive: When a few firms dominate through patents, control of data, or network effects.
The impact depends on how widely accessible the technology is and whether regulation ensures fair competition.
Practice Questions
Define the term creative destruction. (2 marks)
1 mark for identifying that creative destruction involves innovation leading to the replacement of older products, processes, or industries.
1 mark for stating that this process simultaneously creates new markets or industries while destroying existing ones.
Explain how technological change can influence the structure of markets through the process of creative destruction. (6 marks)
Up to 2 marks for identifying that technological change can lead to the creation of new products/markets and the decline of existing ones.
Up to 2 marks for explaining how firms and industries may be forced to adapt or exit the market due to innovation.
Up to 2 marks for linking this to market structure, e.g. increased competition, lower barriers to entry, or concentration of market power if dominant firms exploit innovation effectively.
Maximum 6 marks.
