Learning curve in practice, Microeconomics

Learning Curve in Practice

* Scenario

- A new firm enters chemical processing industry.

* Do they:

1) Produce a low level output and sell at high price?

2) Produce a high level output and sell at low price?

* How would learning curve influence your decision?

* The Empirical Findings

- The study of thirty seven chemical products

- Average cost fell 5.5 percent per year

- For each doubling of plant size, the average production costs fall by 11 percent

- For each doubling of cumulative output, average cost of production falls by 27 percent

* Which is more significant, economies of scale or learning effects?

* Other Empirical Findings

- In semi conductor industry a study of 7 generations of DRAM semiconductors from 1974-1992 found learning rates averaged 20 percent.

- In aircraft industry learning rates are as high as 40percent.

* Applying Learning Curves
1) To determine if it is profitable to enter in the industry.

 2) To determine when profits will occur based on plant size and cumulative output. 

Posted Date: 10/12/2012 4:07:29 AM | Location : United States

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