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Learning Curve
Outline
1. What are economies of scope?
2. Measuring economies of scope
3. Real world examples
4. The learning curve
5. Source of learning
6. Cost and profit maximization
7. The shut down rule
Economies of Scope
If a single firm can jointly produce
goods X and Y more cheaply that any
combination of firms could produce them
separately, then the production of X and Y
is characterized by economies of scope
We should have
this figured out by
now
Sources of learning
•The experience of the workforce tends to
increase with cumulative output—thus workers
are more familiar with the production process
and have their movements/activities become
routinized or a matter of habit.
•There are usually several ways to do a task, and
it takes time and experimentation to find the
best way.
•Quality control for inputs and outputs needs
time to identify potential problem areas.
•Input suppliers have their owning learning
process
Figure 7.6a Example: Texas
Instruments pushed
calculator prices from
about $1,000 to around
Average Cost $10 in the 1970s.
Learning curve
Cumulative Output
Increasing
returns
Learning
LAC (year 2)
1,000 1,500
Rate of Output (per Month)
Figure7.7 Costs and Profit-Maximization: The single product
case
Dollars per Unit of Output
Demand '
AC
MR'
P¡
P*
AC
MC Demand
MR
Q¡ Q* Qmin Q'
Output
Green-shaded area is economic
profit
Figure 7.8 Loss Minimization Means producing Some Output
MC
AC
P* AVC
Marginal Demand
revenue
Q* Output
Summary
If the firm shuts down production, then losses will be
equal to fixed cost, or:
Losses =
If the firm supplies Q* units at the price P*, then:
Losses = P*