Question

How is learning by doing related to the concept of economies of scale? Can a firm enjoy cost savings from both?

Answer 1

Learning by doing refers to the notion that when a firm is in the industry for some time and it has been producing for some time, it gains more insight and experience on the production process and can find ways to be more efficient and reduce cost. For example, Walmart has been in the industry for so many years and has such large operations that it has been able to explore various ways of cutting costs and increasing efficiency.

Economies of scale refer to the notion that firms can produce at a lower average cost by producing in larger quantities. When a firm produces in large quantities, the per unit cost falls and the firm achieves a cost advantage.

Therefore, in both cases (learning by doing or economies of scale) the firm is able to reduce cost and increase efficiency. A firm enjoys cost saving in both the cases. In the first case, the firm cuts cost by acquiring more knowledge and experience regarding the production process. In the second case, the firm cuts cost by producing larger quantities.