Digital Strategy and Markets · Lecture 1

The production function: along the curve, or lifting it

A service desk resolves tickets using workers, systems, and AI tools. With the workers and systems held fixed, the blue curve shows how resolved tickets rise with spending on AI tools. One slider changes the price of the tools, and the desk slides along its curve. The other raises A, the organization term from the lecture, and the whole curve lifts. Watch the desk's chosen spending, its output, and its profit respond.

Baseline = 1.00. Lower it to make the tools cheaper, the move Moore's law made for forty years.
Baseline = 5.00. Raise it to simulate better processes and management: the leftover A from the lecture.
Chosen spending on AI tools
6.25
 
Tickets resolved per day
12.50
 
Profit per day
6.25
 
What to notice. Cut the price of the tools and the desk slides along the same curve to more AI. That is Principle 2 from the lecture: when an input gets cheaper, the firm uses more of it, on an unchanged technology. Raise A and the whole curve lifts: the desk resolves more tickets from the same inputs, which is what better organization does. Both moves raise output. The first buys more of a cheaper input; the second builds organizational capital, and Brynjolfsson and Hitt found the second dominating the long-run payoff from IT.