Question

#11

11. A firm's average cost of production can fall over time if the firm "learns" how to produce more effectively. The learning curve shows how much the input needed to produce a given output falls as the cumulative out- put of the firm increases. 1 C functie wat het of noduction to the

Answer 1

Solution 11: A firm's average costs of production can decline or fall over time if the firm "learns" how to produce more effectively with the available resources. Over a period of time, a firm and the workers associated with the production "learn" how to produce more with the same resources or even lesser amounts of input. With the increase in output and increased efficiency the inputs or resources used in the production decrease, as a result the per unit cost of production is reduced.

The learning curve is used to measure how repeatedly producing and learning the ways of efficient production can increase the outputs produced by a firm and decrease the inputs required to produce them. The X-axis shows how much output is produced, the Y axis shows how much cost per unit is required to produce the desired output. As we have seen in the graph, as output is increased and there is learning from repeated ways of production or experience, the cost per unit declines which shows that there is a decrease in the amounts of resources or inputs used in production.

cost per Unit hearning - Cuove Total output

Let us take an example, say a cost of production of a product is $1000, the learning curve is 90%, so on the next production, the average cost will fall to 0.9*$1000=$900. In this way as a firm learns from experience and repeated production of the same product, the input needed to produce a given output falls as the cumulative output of the firm increases.