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CHAPTER • The Cost of Production 263 Cost (dollars per unit of output) F IGURE 7.13 ECONOMIES OF SCALE VERSUS LEARNING A Economies of Scale A firm’s average cost of production can decline over time because of growth of sales when increasing returns are present (a move from A to B on curve AC1), or it can decline because there is a learning curve (a move from A on curve AC1 to C on curve AC2) B Learning AC C AC Output the firm can lower its cost by scheduling the production of many lots regardless of individual lot size Figure 7.13 shows this phenomenon AC1 represents the long-run average cost of production of a firm that enjoys economies of scale in production Thus the increase in the rate of output from A to B along AC1 leads to lower cost due to economies of scale However, the move from A on AC1 to C on AC2 leads to lower cost due to learning, which shifts the average cost curve downward The learning curve is crucial for a firm that wants to predict the cost of producing a new product Suppose, for example, that a firm producing machine tools knows that its labor requirement per machine for the first 10 machines is 1.0, the minimum labor requirement A is equal to zero, and b is approximately equal to 0.32 Table 7.3 calculates the total labor requirement for producing 80 machines Because there is a learning curve, the per-unit labor requirement falls with increased production As a result, the total labor requirement for producing TABLE 7.3 PREDICTING THE LABOR REQUIREMENTS OF PRODUCING A GIVEN OUTPUT CUMULATIVE OUTPUT (N) PER-UNIT LABOR REQUIREMENT FOR EACH 10 UNITS OF OUTPUT (L)* TOTAL LABOR REQUIREMENT 10 1.00 20 80 18.0 ( ؍10.0 ؉ 8.0) 30 70 25.0 ( ؍18.0 ؉ 7.0) 40 64 31.4 ( ؍25.0 ؉ 6.4) 10.0 50 60 37.4 ( ؍31.4 ؉ 6.0) 60 56 43.0 ( ؍37.4 ؉ 5.6) 70 53 48.3 ( ؍43.0 ؉ 5.3) 80 51 53.4 ( ؍48.3 ؉ 5.1) *The numbers in this column were calculated from the equation log(L) ؍−0.322 log(N/10), where L is the unit labor input and N is cumulative output
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