The paper “ Why Is the Learning Curve of Short Term Most Valuable to the Firm? ” is an informative variant of the math problem on macro & microeconomics. Long-run average cost curves are referred to as an envelope for the short-run average cost curves’ Discuss with reference to relevant examples from an industry of your choice with the aid of a diagram. Perhaps the most important pillar of modern economics is the interplay between demand and supply with price acting as an important component in the whole play (Perloff, 2001).
Price is the key offense mechanism for firms competing in a perfect market scenario (Kreps, 1990). Even in this real world of “ not so perfect” competition prevailing in the market many companies trying to maintain their competitive advantage depend on the price factor for that edge. They try to meet the wants in the economy while competing with other players trying to target the same unfulfilled want and at the same time strive to increase the wealth of the shareholders (the supreme objective of the modern-day organization). The interplay between maximizing wealth and competing in the market on the basis of price, in turn largely depends on the firm’ s ability to tame the cost of production or the cost at which it makes its product/service available to the customer.
With the rise of the Chinese led Eastern hemisphere’ s efficiency and low cost advantage the importance of cost control is being well appreciated by all. Though the cost advantage is a factor that is only achieved with time, the movement along the learning curve in the short period is very important. This short term play or the short tem average cost is the key phenomenon that helps at arriving at the low levels of cost in the long term as well.
In other words the innovations and learning of short term is the thing that determines the long term cost structure of a firm. Thus, it is not wrong to say that the Long run average cost curve is an envelope of the short term average cost curves. The above mentioned factors (namely short term decision making that gives a lower average cost) which has direct impact on the long term cost is very well captured in the following words of the famous economist, Armen Alchian.
• Kreps, D, 1990, A Course in Microeconomic Theory, Princeton, London.
• Lee. D and Mckenzie R., Microeconomics for MBAs, Cambridge University Press, Delhi.
• Perloff, J., 2009, Microeconomics, Pearson, Delhi.
• Pindyck R & Rubinfeld D, 2001, Microeconomics, Prentice-Hall, London.