Lilyan E. Fulginiti
October 1993 [93-WP 116]
Economic theorists for years have considered the possibility that the direction of technical change is altered by changes in relative prices. Prices have also been identified as one of the determinants of technical change through innovation. This paper extends the theory of the firm to cover situations in which the firm's technology set is conditional on expected prices. The basic idea is to distinguish between "market prices," or the prices that guide the firm's choices subject to the technology that is in place, and "normal prices," the prices conditioning the choice of technology. A "generalized" price effect is obtained that includes the traditional price effect as well as the technical change effect of price changes and an example is presented.
Keywords: conditional technology, market prices, normal prices, technical change.
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