100

AC1f

Thus, as cumulative total output doubles, average cost is expected to fall by 10 percent. If annual production is projected to remain constant, it will take 2 additional years for cumulative output to double again. One would project that average unit costs will decline to $81 (90 percent of $90) in 2004. Because cumulative total output at that time will equal 4 years' production, at a constant annual rate, output will again double by 2008. At that time, the learning curve will have reduced average costs to $72.90 (90 percent of $81).

Because the learning curve concept is often improperly described as a cause of economies of scale, it is worth repeating that the two are distinct concepts. Scale economies relate to cost differences associated with different output levels along a single LRAC curve. Learning curves relate cost differences to total cumulative output. They are measured by shifts in LRAC curves over time. These shifts result from improved production efficiencies stemming from knowledge gained through production experience. Care must be exercised to separate learning and scale effects in cost analysis.

Research in a number of industries, ranging from aircraft manufacturing to semiconductor memory-chip production, has shown that learning or experience can be very important in some production systems. Learning or experience rates of 20 percent to 30 percent are sometimes reported. These high learning rates imply rapidly declining manufacturing costs as cumulative total output increases. It should be noted, however, that many learning curve studies fail to account adequately for the expansion of production. Therefore, reported learning or experience rates sometimes include the effects of both learning and economies of scale. Nevertheless, managers in a wide variety of industries have found that the learning curve concept has considerable strategic implications.

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