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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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