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.