Learning, experience, and firm size

The process of producer's learning by experience is characterized as a parameter-adaptive process, rather than an ad hoc specification, that includes the accumulated volume of output in the firm's cost function. Deviations from the neoclassical optimization conditions can be decomposed into learning and production variation components. In a given time period, the production level may be greater or less than the level associated with price equals marginal cost, depending on the learning value and the direction of the marginal risk of production. The uncertainty-based measure of elasticity of scale is presented and indicates that the traditional view that the presence of uncertainty can discourage the managerial decision to expand is restrictive.