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Thus, as per the table, the Average Labor Cost per batch is going down from Rs. 500 and this labor cost per hour stays fixed, then the average cost of labor required to produce a batches of good 'X' is goes down on account of increased output from the same amount of labor hour input. If we assume that labor cost per hour is Rs. 500 per Labor Hour)įrom the above table it is clear that the average number of hours required to produce a batch of particular good say 'X' is going down on account of Learning Curve Effect. The Learning Curve effect can be further explained by using the following data table:Īverage Number of Labor Hours Required to a BatchĪverage Cost of Labor (If Labor Cost is Rs. The labor hour requirement per lot further goes down by the time company is producing the third and the fourth lot of the Good or Product. While the labor hours required for producing the second lot is close to two hours.

As per the above depicted diagram (figure 1) the labor hours required to produce the first lot is close to four hours. The labor hours required per lot of production to produce the second lot or later lots on the other hand is lower. It is clear from the diagram that the labor hours required to produce each lot is higher when the firm is producing the first or initial few lots or batches of good. In the above diagram on the X axis, we have taken the number of lots or batches of Good produced and on the Y axis we are considering the labor hours required per lot of Good produced. Managers who are involved in the management and scheduling of the production process also get familiar with the process and are thus in better position to use the resources at their disposal in better manner as well as scheduling the production process more efficiently thus leading to more output for the same amount of input.įollowing Diagram is representation of the Learning Curve Effect:.

Thus, they require less time or labor hours to generate same amount of output which they were earlier producing by using more labor hours.

The labor units or the workers who are engaged in the production or manufacturing process become familiar with the process of production with the passage of time.

This happens on account of following factors: Here ‘Efficiency’ means greater amount of output generated per labor unit over the same amount of input of labor hours in the process of production. This leads to improvement in their efficiency level. In other words, Learning Effect leads to fall in the cost of production per unit because with the increased involvement in the production process Labor and Managers become more and more familiar with the production process. Learning Curve measures the relation between increase in per worker productivity (leading to decrease in per unit labor cost at fixed prices) associated with an improvement in labor skills from on the job experience.

Understand and compare the difference between the positive impact of 'Economies of Scale' and 'Learning Effect' on a firm.

Understand and appreciate that why the cost per unit of output and labor hours required to produce a product goes down even if a firm may not be enjoing significant 'Economies of Scale'.

Understand the concept of Learning Curve Effect.

In this module the concept and application of Learning Curve Effect has been covered in detail.Īfter reading this chapter, you are expected to learn about: This phenomenon can be termed as 'Learning Effect'. There is another phenomenon which also contributes to the fall in the average cost of production as the output of a firm increases. However, the factor of Economies of Scale cannot be the only reason for the fall in the average cost of production as output of a firm increases. Long Run Cost theory suggests that a firm observes fall in its average cost of production in the long run on account of the firm enjoying benefits of ‘Economies of Scale’ and ‘Increasing Returns to Scale’ in the long run.