Figure 810

Long-Run Average Cost Curve Effects of Learning

Learning will cause a downward shift from LRACt to LRAC(+1. An average cost decline from C to A reflects the effects of both learning and economies of scale.

Long-Run Average Cost Curve Effects of Learning

Learning will cause a downward shift from LRACt to LRAC(+1. An average cost decline from C to A reflects the effects of both learning and economies of scale.

Output

every output level in period t + 1, which means that Qt units could be produced during period t + 1 at an average cost of B rather than the earlier cost of C. The learning curve cost savings is BC. If output were expanded from Qt to Qt+j between these periods, average costs would fall from C to A. This decline in average costs reflects both the learning curve effect, BC, and the effect of economies of scale, AB.

To isolate the effect of learning or experience on average cost, it is necessary to identify carefully that portion of average-cost changes over time that is due to other factors. One of the most important of these changes is the effect of economies of scale. As seen before, the change in average costs experienced between periods t and t + 1 can reflect the effects of both learning and economies of scale. Similarly, the effects of important technical breakthroughs, causing a downward shift in LRAC curves, and input-cost inflation, causing an upward shift in LRAC curves, must be constrained to examine learning curve characteristics. Only when output scale, technology, and input prices are all held constant can the learning curve relation be accurately represented.

Figure 8.11 depicts the learning curve relation suggested by Figure 8.10. Note that learning results in dramatic average cost reductions at low total production levels, but it generates increasingly modest savings at higher cumulative production levels. This reflects the fact that many improvements in production methods become quickly obvious and are readily adopted. Later gains often come more slowly and are less substantial.

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