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Learning Curve Analysis in Business: Definition & Examples

Instructor: Anthony Aparicio

Tony taught Business and Aeronautics courses for eight years; he holds a Master's degree in Management and is completing a PhD in Organizational Psychology

We have all experienced a learning curve, but it can be applied to business perspective as well. Learn the definition of a learning curve, the formula, and follow some examples.

Learning Curve on a Personal Level

Terry is a college student and was very excited to go on spring break. He decided that he and some of his friends were going to go camping so he went and purchased a brand new tent. Upon arriving at the first camp site, Terry took out the instructions, laid out all the material and poles, and took 40 minutes to construct his tent.

The next morning they packed up their gear and hiked through the mountains to the next camp site. Terry had an easier time constructing his tent this time because he was more familiar with it. It took him 30 minutes. By the end of the trip, Terry could set up his tent in about 23 minutes.

This is a personal experience with a learning curve, when you get faster at doing as you repeat it. This concept also applies in business, especially in the production of goods.

Learning Curves in Business

Companies make new products and employees learn new skills. Whether a factory worker is learning to use a new machine to make plastic toys or a computer programmer is learning how to build a website, each of them will experience a learning curve. They will spend less time and cost on each successive attempt as they gain proficiency, learn shortcuts, and make templates.

Formula

There is a formula that can be used to estimate one or more factors of the learning curve depending on the slope of the curve. The formula can be expressed as:

Y = aXb

Where:

  • Y represents the average time/cost over the production period
  • a is the time/cost to produce the first unit
  • X is the total quantity of units produced
  • b is the slope of the function when graphed

Each time the number of attempts of the process is doubled, the overall cost will decrease by a constant amount.

Examples

Say the cost of producing a product is $100 during the first attempt. There is a 90% learning curve, so on the second attempt, the average cost should decrease to $90 ($100 x 90%).

If the number of attempts is doubled again (to four) then the average cost should again go down to $81 ($90 x 90%). We can continue this by again doubling the number of attempts to eight and seeing the average cost go down to approximately $73 ($81 x 90%).

The terms used to describe this would be a 10% rate of reduction or a 90% learning curve.

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