In many of the manufacturing processes the average costs decline substantially as the cumulative total output increases. This is the outcome of both labor and management becoming more knowledgeable about production techniques with growing experience. “There is an element of learning involved through experience.” Practice makes a man perfect. Doing the work repetitively makes labor more efficient. Productivity is enhanced and these lessons of enhanced productivity lead to greater efficiency which in turn will result in overall reduction in the average cost of production.
Learning Curve in Economics
According to James L. Pappas and Mark Hirschey “The learning curve (also known as experience curve) phenomenon has an effect on average costs similar to that for any technological advance that provides an improvement in productive efficiency.”
Learning through experience in production enables the firm to produce output more efficiently and economically at each and every level of output.
Above figure shows the hypothetical long run average cost curves for periods t and t+1. As a result of more experience and enhanced knowledge of production method the long run average costs have declined from LRACt to LARCt+1 for every level of output. This implies that before any learning or experience Qt output was produced at the average cost of OA; whereas after ‘experience’ gained Qt output is produced at average cost of OB. Thus AB represents cost saving.
The effect of learning on production curve comes as a result of several types of improvements; such as; job familiarization, less time required to instruct workers, development of skill, getting better equipped through training, short-cut methods of production, improved competition-ordination, better competition-operation etc Aircraft manufacturers, ship-building, manufacturer of electronic items testify the effect of learning and experience on cost.
Learning or experience rates of 20 to 30 percent are often reported. If the learning rate is, say, 20% then we can conclude that every time, the quantity of output produced doubles the accumulated average time for all units produced to that point will be 80% of its former level. E.g. if to produce first 10 units of X, an average of 100 man-hours each are required then to produce first 20 units of X (i.e. inclusive of the first 10 units of X) on an average 80 man-hours each will be required.
It must be noted that the learning curve relation be accurately represented only when output scale, technology and input prices are held constant. Mistakenly often the learning curve in economics is identified with Economies of Scale. It must be remembered that although related, the two are quite distinct. Economies of Scale are shown in terms of Cost-output relation measured along the same Long Run Average Cost Curve; whereas, Learning Curve relate cost differences to total cumulative output levels for a single product. These are measured in terms of shifts of long-run average cost curves. Care needs to be taken to separate learning and scale effects in cost analysis.