Sunday, February 8, 2015

Economies of Scale Versus the Learning Curve



As Besank et al note, there is a difference between economies of scale and the learning curve (81). With the learning curve, a company can do something at a less expensive unit cost after time, where economies of scale are lower costs the more you do.
            These two concepts are independent of each other. Whether one is more important than the other seems to rely on the level of complexity within the task of a company. If something is simple, but takes a lot of capital to be done, economies of scale will take place. An example of a simple, capital-intensive business would be the operation of a strip mine. Once a business has the plot of land in which it wants to mine, all it needs is more equipment and relatively easily trained operators for that equipment. The more equipment, the more the company can carry out of the mine, and the cheaper each pound of rock is to take out.
            Conversely, throwing capital at different problems is not always the answer. Sometimes human capital is the most important element of a business. Often a service provider can be an example, but it exists in skilled manufacturing. For example, some of the most expensive watches in the world are still made by hand in Switzerland. These watches are miracles of the jeweler’s craft, even if the best made watch will never keep time as well as a twenty-dollar digital watch. The companies that make these watches position their wares as luxury goods, so that they are not in the same market as the cheap digital timepiece. They are made at a small scale for discerning buyers. Here is where the learning curve is important. Well-trained watchmakers will be able to make more watches faster and with higher accuracy. This allows a company that employs these artisans to have lower costs per unit. It also discourages new entrants to the market, keeping the retail value of the watches they sale inflated.
            With the two examples, it becomes possible to say that both the learning curve and economies of scare are important to the financial health of companies. The important difference is the human factor between which one will be more important.

          References

Besanko, D., Dranove, D., Shanley, M., & Schaefer, S. (2013). Economics of Strategy (6th ed.). New York: Wiley.