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The learning curve shows the relationship between labour cost and additional units
of output. It slopes downwards indicating that the additional cost per unit declines
as the level of output increases because workers improve with practice. The
reduction in cost from this particular source of improvement is often referred as the
learning curve effect.

As firms gains experience in the production of commodity or service, their average

cost of production usually declines. The LEARNING CURVE shows the decline in the
average input cost of production with rising cumulative total outputs overtime. For
example, it might take 1000hrs to assemble the 100th aircraft but only 100hrs to
assemble 200th aircraft because managers and workers more efficient as they gain
experience in the production. On the other hand, economies of scale refers to
declining average cost as the firm's output per unit period increases.


The learning curve is explained in figure, it indicates that the average cost declines
from Rs.60 for producing the 100th unit of production at the point A, to about Rs.45
for producing 200th unit at point B, to about Rs.35 for producing 400th unit at point
C. It can be observed that the average cost is declining at a decreasing rate. The
usual shape of learning curve is that it is convex to the origin because firms usually
achieve the largest decline in average input costs when the production process is
relatively new and less as the firm matures.

Learning curves have been cited in many manufacturing and service sectors,
ranging from the manufacturing of airplanes, appliances, shipbuilding and so on.
They have also been used to forecast the needs for personnel, machinery and raw-
materials and for scheduling production, determining the price at which to sell
output and even for calculating supplier's price quotations. For example, the
JAPANESE have used the learning curve in driving down costs. This is clearly shown
in their computer chips and consumer electronics. The use of learning curve
involves accelerating production experience through aggressive price cutting
measures. They believed that the price cuts will increase sales which will increase
its cumulative output rapidly and thereby benefit from learning by doing. This in
turn help to bring down costs of production faster.

The reason given for the learning curve effect was the repetition of tasks performed
by workers actually manufacturing the product. Later on the experience gained
from repetition by those indirectly related to the production process was also
included in this phenomenon. Thus, factors such as the development of new process
and engineering methods, the substitution of lower cost materials or processes and
product redesign were consider as causing unit costs to fall as production levels
increased. The recognition of these additional factors has led to the use of the
broader term experience curve. Today, the terms experience curve and the learning
curve are generally used interchangeably. However, some business managers and
consultants prefer to make a distinction between the two terms.

The concept of producers surplus is a concept of analogus to the concept of
consumer surplus explained earlier. Producer surplus is defined as the access of
money receipt of a producer over his minimum supply price. In other words,
producer surplus is the excess of the market price of the commodity over the
minimum price that the producer must receive. The minimum price that the
producer must receive is equal to the marginal cost of supplying each unit. Thus

Producer surplus = market price of the commodity – minimum price that producer
must receive

The measurement of producer surplus is explained in the following table

In table the market price of the commodity is assumed to be rupees 6 per unit. The
minimum supply price rises as the producer produces additional units due to rise in
the marginal cost. The column 4 shows the producer surplus for each unit. At the
price rs 6 the producer will sell 5 units because at 5 unit market price of the
commodity equals the minimum supply price and therefore the producer surplus for
the 5th unit is 0. The producer surplus in the sum of producers surplus on each unit,
that is , 4+3+2+1+0= 10 rupees.

In this figure the curve SS1 is the supply curve. The positive of the supply curve
reflects the fact that higher prices must be pid to producers to cover rising marginal
cost and thus induce them to supply larger quantity of the commodity. For example
the supply curve of the figure shows that the supply price in order to supply one
unit of the commodity is rs. 2 for 2 units, the supply price is rs 3 and so on.

It can be seen from the figure that the price of rs 6 the producer sells 5 units of the
commodity. It can be observed from the figure that the minimum supply price for
the first unit is rs 2 and therefore the producer receives a surplus of rs 4 on the first
unit this is given by the area of the first shaded rectangle. The minimum supply
price on second unit is rs3 and therefore producer surplus is rs 3. This equal to the
area of the second shaded rectangle. The minimum supply price on the third unit is
rs4 and the producer surplus is rs 2. This is equal to the third shaded rectangle. the
minimum supply price on the 4th unit is rs5 and the producer surplus is rs 1. This is
equal to area of 4th shaded rectangle. The minimum supply price on the 5th unit is rs
6 and the producer surplus is 0. By adding the producer surplus of rs 4 on the 1st
unit and rs0 on the 5th unit , we get the total producer surplus of rs 10 from the sale
of 5 units.

If the commodity is infinitesimally divisible, the total producer surplus will be equal
to the area of triangle SBE. It is equal to the difference between the total revenue of
the producer given by the area OBEF and the minimum cost the producer will incur
to supply 5 units given by the area OSEF.

If the price of the products fall the total producer surplus become less. On the other
hand, if the price of the commodity rises the total producer surplus would be more.