ABSTRACT
In this chapter we begin with a discussion of the following question: how do we distinguish a change in an input-output combination made’by a firm (or economy) in response to a movement in relative prices from a change in this combination made in response to an innovation? The aspects to be considered are theoretical and empirical. We first define measures of these two responses, to be called the substitution effect and the technological bias effect respectively. We then note that, at least in theory, a separation of the two effects is possible, and we discuss how this can be done for several alternative ways of defining the effects. We shall pay particular attention to two such definitions, one due to Hicks and another to Harrod, which are both widely used by economists. These two definitions are introduced in the first section, where their many interpretations and mutual relations are also discussed.
