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Notes On Calculating The Experience Curve Notes

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Notes on Calculating the Experience Curve

To Calculate the Experience Effect:
The experience effect is defined as (1- 'k'). This is the amount by which the cost drops each time production doubles.
You need to start by calculating the % change between the unit cost for x units and the unit cost for 2x units.
The formula for this is:
= (Original Price-New Price)
= (Difference in Price/Original Price)
The answer to this is (1-'k').
e.g.
By the time 5,000 had been produced the unit cost would have dropped to PS871
And
BY the time 10,000 had been produced the unit cost would have dropped to PS803
= (871-803)
= 68
= (68/871)
=0.078
Therefore (1- 'k') = 0.078.
You then need to calculate 'k'.
e.g.
= 0.078 = (1-'k')
= 'k' = 1-0.078
= 0.922
Therefore 'k' is 0.922. The experience effect is 7.8%. I.e. costs drop by 7.8% each time the production doubles.

To Calculate 'z':
To compute the 'z' component of the experience curve you need to use the following formula:
z = - log(k) / log(2)
Log k is replaced with the log on the answer you calculated for 'k' in the above section.
e.g.
z = - log(k)/ log(2)
z = -log(0.922)/log(2)
z = -0.11727

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