Dynamic Changes in Costs: The Learning Curve

*  The learning curve measures impact of worker's experience on costs of production.

*  It describes relationship between a firm's cumulative output and amount of inputs required to produce a unit of output.

* If N=1

- L equals A + B and this measures labor input to produce the first unit of output

-   If β = 0

- Labor input remains constant as the cumulative level of output increases, cause there is no learning.

* If β > 0 and N increases

- L approaches A, and A represent minimum labor input unit of output after all learning has taken place.

-   The larger β:

- The more important becomes the learning effect.



* Observations

  1) New firms can experience learning curve and not economies of scale.

 2) Older firms have small gains from learning.

Economies of Scale Versus Learning



* The learning curve implies:

 1) The requirement of labor falls per unit.

 2) Costs will be high at 1^st and then will fall with learning.

 3) After eight years the labor requirement will be 0.51 and per unit cost will be ½ what it was in the 1^st year of production?