For this, one has to first determine the values of the log a and b parameters in equation (2). If we do not have any historical cost output data for the production process, we should make subjec­tive estimates of these parameters based on prior ex­perience with similar type of production operations. Computations of average productivity make sense for key inputs around which production processes are designed. In the example of the accounting firm used in this chapter, the number of accountants is probably a good choice.

For Teams

Although the company was not involved in the manufacture of the prototypes, sim­ilar products have been made by the existing labour force and machinery. For example, the Windows program Notepad is extremely simple to learn, but offers little after this. At the other extreme is the UNIX terminal editor vi or Vim, which is difficult to learn, but offers a wide array of features after the user has learned how to use it. For the performance of one person in a series of trials the curve can be erratic, with proficiency increasing, decreasing or leveling out in a plateau. Used to store information about the time a sync with the AnalyticsSyncHistory cookie took place for users in the Designated Countries.

A high or steep learning curve indicates that it takes a substantial amount of resources to perform an initial task. However, it also signifies that subsequent performance of the same task will take less time due to the task being relatively easier to learn. A high learning curve indicates to a business that something might require intensive training, but that an employee will quickly become more proficient over time.

Key Variables in the Learning Curve

In many of the manufacturing processes the average costs decline substantially as the cumulative total output increases. This is the outcome of both  labor  and management becoming more knowledgeable about production techniques with growing experience. “There is an element of learning involved through experience.” Practice makes a man perfect.

How Is a Learning Curve Measured and Calculated?

You may have heard your colleagues or manager talking about a new system or product that has a “steep learning curve”. They maybe saying this as they feel the system is difficult to pickup or learn. What they are referring to is the time it takes for an employee to learn the process or system.

Productivity and the Learning Curve

The learning curve is another key concept that is applied to measure the aspects of experience and efficiency gains in time. First, the rate of increase within the first units is steep, but the rate drops to a steady slope, and then to a horizontal line. Analysis of the learning curve offers businesspersons important insights into the optimization of production systems, cost control, and training strategies.

• One of the key constraints of the learning curve is that there is a plateau.
• If the learning rate is, say, 20% then we can conclude that every time, the quantity of output produced doubles the accumulated average time for all units produced to that point   will be 80% of its former level.
• In addition to the increased profit potential of improved productivity, new firms or firms starting new operations need to anticipate these gains in deciding whether to engage in a new venture.
• In the case of labor, the productivity of individual workers will rise as they gain experience and new workers can be trained more effectively.
• However, when the firm moves from A1 on AC1 to A3 on AC2 , there is a reduction in cost on account of learning.

Thus the rate of decline in average cost for each successive unit of production will diminish as cumulative production increases. If the learning rate is, say, 20% then we can conclude that every time, the quantity of output produced doubles the accumulated average time for all units produced to that point   will be 80% of its former level. E.g. if to produce first 10 units of X, an average of 100 man-hours each are required then to produce first 20 units of X (i.e. inclusive of the first 10 units of X) on an average 80 man-hours each will be required. However, the graph above fails to demonstrate how the process is becoming more efficient. Because of the graph’s upward slowing curve, it appears it takes incrementally more time to perform more tasks. However, due to the nature of the learning curve, the x-axis is doubling and incrementally taking less time per unit.

There are several data points to choose from, one of which is the total cumulative time needed to produce a given number of tasks or units. In the graph below, the learning curve shows that more time is needed to generate more tasks. This means that every time we double the cumulative quantity, the process becomes 20% more efficient. Usually, when a product is first produced, the average cost of production is high because the first firm needs to learn by trial and error the best way to make the product. However, the more that the product is produced, firms will find more efficient ways to produce, and so they will learn how to make the good more efficiently. There are many different ways that firms can learn how to make goods cheaper.

• A high or steep learning curve indicates that it takes a substantial amount of resources to perform an initial task.
• It is also a vital tool for businesses to optimize processes, forecast cost reductions, and allocate resources effectively.
• Generally, economies with higher levels of education have higher real wages.
• The proportion of labour used in tasks that are not machine-paced is an important deter­minant of the learning rate.

Despite creating more products, the team will not make any additional gains in their productivity rate. At this point, in order for the business to break through the plateau and realize more efficiency gains, they will need to explore other options, such as process re-engineering or new technology. Complex learning curve – it is believed that the complex learning curve is simply the learning curve observed over a longer period of time. In this curve, the individual may experience a temporary belief of mastery, only to uncover that they actually have even more to learn. As a result, the lower the learning curve percentages, the steeper the slope of graphs.

Types of Learning Curves

If Aman starts using personal computers on more regular basis then the time required by him to type such 500 word document will also reduce on account of the ‘Learning Curve Effect’. Finally, the strict reliance on the curve can make an organization very inflexible. This can leave them vulnerable to changing market conditions and competitive forces.

“Steep learning curve”

Empirical findings reveal that in some firms, the long-run average cost declines over time because workers, managers, and entrepreneurs easily absorb the latest technological information and thus become more experienced. The Chloride Ltd., manufacturer of Exide bat­teries, is trying to develop a learning curve model to help forecast labour costs for successive units of one of its products. From the past data, the com­pany knows that the labour costs of the 25th, 75th and 125th units were Rs. 800, Rs. 600 and Rs. 500, respectively. Note that the number of units required to double cumulative production will get progressively higher. For example, if cumulative production now is 1000 units, the next doubling will occur at 2000 cumulative units, with the next doubling at 4000 cumulative units, and the following at 8000 cumulative units.

Even if the firm continues to produce at the same rate each period, it will see declines in the average cost per unit of output, especially in the initial stages of operation. The Y- Axis shows the number of hours of labour needed to produce one unit of X. The labour input per unit of output directly affects the production cost because the fewer units of labour required per unit of output, the lower the marginal and average cost of production. A learning curve is a concept that graphically depicts the relationship between cost and output over a defined period of time, normally to represent the repetitive task of an employee or worker. The learning curve was first described by psychologist Hermann Ebbinghaus in 1885 and is used as a way to measure production efficiency and to forecast costs.

When β is equal to 0, labour input per unit of output remains the same as the cumulative level of output increases. As learning takes place, these costs tend to fall with an increase in output. As the worker learns from experience lesser and lesser hours are required to finish the same job. Thus, the learning curve theory enables us to predict the aver­age cost at different levels of learning curve in economics contemplated output.

This explains why the budget plan should incorpo­rate the effect of learning on costs which, in turn, are related to budgeted volume. At early stages of the production process, the volume of output is usually low. But, with an expansion in this scale of produc­tion, the learning effect will gradually become more and more strong. (a) To determine the relationship between the cumulative number of units completed and cumula­tive average direct labour cost for product L.