Understanding economies of learning
Economies of learning are the cost savings that come from having refined an activity. Over time companies develop better practices and ways of operating. There is typically a learning curve with firms starting off relatively badly and over time getting better at a particular activity. This can result in cost savings in the process.
Examples of what causes economies of learning
Some of the most important ways in which the operations of a firm typically become more efficient over time include:
Firms may identify opportunities to speed up production, potentially while keeping the overheads the same. This increase in efficiency can bring down the average cost per part – the labor and machinery involved in each component produced declining as the production process is refined.
Beyond faster operations, some savings can also come from a reduction in the number of mistakes made in the production process. Production mistakes can result in scrap – wasting both the materials involved in the component as well as the labor in the production process. By refining the approach over time, and reducing the proportion of goods that are wasted, companies can increase the overall efficiency of their operations.
Better routines and more efficient ways of operating
Beyond faster operations and fewer mistakes, accumulated learning may also help reduce other costs in the production process. For example, it is possible companies may identify ways of reducing inventory levels throughout the production process, in turn resulting in leaner operations with less capital tied up in work-in-progress.
How economies of learning are different to economies of scale
Economies of learning and economies of scale are two distinct means of improving the overall production process. In economies of scale, the efficiency comes from the volume of production in that time period – for example, due to increased purchasing powers.
Economies of learning come from having done an activity a lot in the past. Even if your current period’s production is low (i.e., low economies of scale), a firm may benefit from substantial accumulated learning from prior periods.
Thus, the basis of economies of learning from accumulated prior volumes, while economies of scale come from volumes in that period. Naturally, a firm that has both substantial prior accumulated volumes and also substantial volumes that period will benefit from both economies of learning and economies of scale.