Blackwell Reference Online

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The learning curve refers to the reduction in average total cost which occurs as workers gain experience from producing a product over time, and for this reason it is also called the experience curve. Unlike economies of scale where long run average costs decrease when more output is produced per period of time, the learning curve shows the reduction in average costs arising from the total accumulated volume of production to date. Therefore if a firm produced 2 million units per month at minimum efficient scale and the average cost per unit was $10, if there were learning effects in production, they would cause the average cost curve to shift down over time. In this example, the firm might find that its average costs of production fell to $8 per unit once the firm had produced 24 million units over a year, even though production remained at 2 million units each month. One of the first theoretical treatments of learning effects was provided by Arrow (1962) , and learning curves have been estimated for a variety of industries (see Ghemawat, 1985 , for a survey). When significant learning effects exist, they can confer strategic advantages ( see first‐mover advantages ) to those established firms which increase their production volumes quickly to reduce their costs ( Porter, 1980 ). To take advantage of the learning curve, managers should set prices for new products below ... log in or subscribe to read full text