Economies of scale and learning effects are often confused. While they both relate to the volume of products that have been produced, they both have distinct sources of cost advantages. This article explores the differences between economies of scale and learning effects.
Economies of scale
Economies of scale originate from higher volumes of production in a particular period – for example, the annual production of a particular good.
Examples of how economies of scale can reduce cost include:
- Better bargaining power
- Spreading fixed costs spread over a larger number of products
- Labor costs per unit may decline
- Reduced changeover times
Learning effects
Learning effects are based on learning, developed over the cumulative production process. While economies of scale originate from volume differences in any particular period, learning effects arise from greater experience. Learning may take the form of more efficient ways of producing a product, better routines that speed production, or a greater understanding of the operations reducing the likelihood of mistakes and the need for re-work.
Illustrating the difference between economies of scale and learning effects
To illustrate the difference between economies of scale and learning effects, it is useful to examine extreme cases – situations where only one of the cost-saving occur.
Learning effects, but no differences in economies of scale
With learning effects, the key basis of cost-saving originates from the volume that has been manufactured in the past. A company that has produced 10,000 units per year for 10 years is likely to have significant accumulated learning over a company producing 10,000 for the firm time, even though both have the same volumes in a particular year.
Economies of scale, but no differences in learning effects
To extend the above example, if two firms have both historically made 100,000 units (potentially 10,000 per year for ten years), but now differ substantially in their volumes – one firm at 10,000 a year, the other at 50,000, then there will be economy of scale differences despite no differences in cumulated learning. The company with higher current volumes may be able to achieve cost savings through, for example, better bargaining power or spreading fixed costs over a larger number of products.
Scale benefits leading to learning effects
While economy of scale benefits and learning effects are distinct from one another – scale advantages over time will separately lead to greater accumulated learning. In the above example, where despite the same cumulated volume (i.e., no differences in learning effects), one firm is producing more in a given period (i.e., leading to economy of scale benefits), this difference in production volume will also lead to greater learning over time. If you are producing 50,000 units in a year, while your competitor only 10,000, not only wil you achieve greater economies of scale, but over the years, you will also see greater accumulated learning.
Related Articles
