Learning Curve: An Important Modern Concept in Economics

The learning curve is the amount of time and/or cost that decreases as a person becomes more familiar with completing a task. There are two ways to state a learning curve, one as a rate of reduction and the other as the learning curve percentage. 1 The term experience curve is more of a macro concept, while the term learning curve is a micro concept. The term experience curve relates to the total production, or the total output of any function such as manufacturing, marketing, or distribution. The development of experience curves is attributed to the work of Bruce Henderson of the Boston Consulting Group around 1960.

The cumulative average hours and cost as well as cumulative total hours and cost are provided below for doubled quantities 1 through 8. Arrow, one of the pioneers in putting forward this concept calls it “Learning by doing”. The slope of the learning curve represents the rate in which learning translates into cost savings for a company.

What is a learning curve?

As workers produce more product, the per-unit cost will often decrease. Let’s illustrate the 80% learning curve with a person learning to design and code websites of similar size and complexity. If the first website takes 100 hours, then after the second website the cumulative average time will be 80 hours (80% of 100 hours).

Companies know how much an employee earns per hour and can derive the cost of producing a single unit of output based on the number of hours needed. A well-placed employee who is set up for success should decrease the company’s costs per unit of output over time. Businesses can use the learning curve to conduct production planning, cost forecasting, and logistics schedules. The learning curve also is referred to as the experience curve, the cost curve, the efficiency curve, or the productivity curve.

An important question, ignored to this point, is how do we find the learning rate in the first place? If we have data for two lots of units we can find the learning rate by using simultaneous equations.

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Thus, we will examine Wright’s model first and Crawford’s somewhat more involved approach second. It is important to note that reduction in cost per unit due to the learning curve effect is different from economies of scale. The learning curve effect is usually expressed as a constant percentage. This percentage repre­sents the proportion by which cost per unit of output declines with the increase in cumulative output in each successive time period.

Another difference is that the cumulative average hours and cost decrease by a variable rate in Crawford’s model. This does not present a problem when using Crawford’s model because the cumulative averages are not required for predicting cost. The theory of the learning curve or experience1 curve is based on the simple idea that the time required to perform a task decreases as a worker gains experience. Learning curves are useful for preparing cost estimates, bidding on special orders, setting labor standards, scheduling labor requirements, evaluating labor performance, and setting incentive wage rates.

That is why the learning curve is downward sloping in the beginning with a flat slope toward the end, with the cost per unit depicted on the Y-axis and total output on the X-axis. As learning increases, it decreases the cost per unit of output initially before flattening out, as it becomes harder to increase the efficiencies gained through learning.

Learning Curve Theory

What does the phrase learning curve mean?

A Learning Curve is a graph depicting relationship between learning and amount of effort. And the learning is the outcome. In informal usage, a “steep learning curve” means something that is difficult (and takes much effort) to learn.

The cumulative average of 80 hours consists of 100 hours for the first website plus only 60 hours for the second website resulting in a total of 160 hours divided by 2 websites. After the fourth website the cumulative average time will be 64 hours (80% of 80 hours). After the eighth website the cumulative average will be 51.2 hours (80% of 64 hours). In other words, the total time to have completed all eight websites will be 409.6 hours (8 websites times an average time of 51.2 hours). P. Wright in 1936 and is referred to as the Cumulative Average Model or Wright’s Model.

  • This means that the cumulative total time would not increase because it would equal 100% of the previous cumulative total time.
  • Notice from Table 2 that the unit labor hours (column 2) and unit labor cost (column 4) decrease by 20% each time the cumulative output is doubled.

That is to say, we can use it to predict how difficult the learning would be for an ‘average’ learner. When time is the measure of effort, we can predict how fast learning may happen and how fast forgetting or loss of skill may happen. We need to be very careful in making predictions from learning curves (or any statistics), because there are always assumptions.

This is because the learning curve provides measurement and insight into all the above aspects of a company. The idea behind this is that any employee, regardless of position, takes time to learn how to carry out a specific task or duty.

Increasing-Returns Learning Curve

19.16 where on the X-axis cumulative total output over successive periods of time and on the F-axis cost per unit of output are measured. 19.16 that the learning curve shows downward which shows declining cost per unit of output as cumulative output increases over time and the firm learns from its work experience. An 80 percent learning curve means that the cumulative average time (and cost) will decrease by 20 percent each time output doubles. In other words, the new cumulative average for the doubled quantity will be 80% of the previous cumulative average before output is doubled. For example, assume that direct labor cost $20 per hour in the problem above.

The steeper the slope, the higher the cost savings per unit of output. This standard learning curve is known as the 80% learning curve. It shows that for every doubling of a company’s output, the cost of the new output is 80% of the prior output. As output increases, it becomes harder and harder to double a company’s previous output, depicted using the slope of the curve, which means cost savings slow over time. The equations provided above show how to use the learning curve to predict the time and cost of a specific quantity of units assuming that we know the learning rate.

A learning curve is a concept that graphically depicts the relationship between the 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. Manufacturing costs as related to workforce performance can be tracked by using the learning curve. Instead of performance and number of attempts, the values could be unit cost or unit labor hours and cumulative production in units.

The amount of time needed to produce the associated output is high. Then, as the task is repeated, the employee learns how to complete it quickly, and that reduces the amount of time needed for a unit of output.

For example, assume two lots have been produced, one lot contained 2 units and a second lot contained 4 more units. Graphical representation of the common sense principle that more one does something the better one gets at it. Learning curve shows the rate of improvement in performing a task as a function of time, or the rate of change in average cost (in hours or dollars) as a function of cumulative output.

For example, compare column 2 in Table 1 with column 3 in Table 2. The cumulative total hours for 8 units is 409.6 based on Wright’s model and 534.6 based on Crawford’s model.

learning curve definition

What is the learning curve theory?

The learning curve theory states that the effort to complete a task should take less time and effort the more the task is done over time. The theory can also be expressed as a mathematical function that can be used as a prediction tool.

Comparing the two learning rates we have .90 for Wright’s model and .832 for Crawford’s model. This reinforces the fact that the two models are not compatible when the same learning rate is used.

This means that the cumulative total time would not increase because it would equal 100% of the previous cumulative total time. Notice from Table 2 that the unit labor hours (column 2) and unit labor cost (column 4) decrease by 20% each time the cumulative output is doubled. However, the cumulative total labor hours (column 3) and cumulative total labor cost (column 5) increase by a variable rate. This means that columns 3 and 5 are much more difficult to develop. It also means that the cumulative total hours and cost generated by the two models are not compatible when based on the same learning rate.

A second model was developed later by a team of researchers at Stanford. Their approach is referred to as the Incremental Unit Time (or Cost) Model or Crawford’s Model. Simple learning curve problems are more easily introduced with Wright’s model, although Crawford’s model is widely used in practice.