Cost Function

Cost function states the relationship between cost and determinants. It can be expressed in form of an equation.

C = F (Q, F, P)

The total cost (C) is a function of total output (Q), factor productivity (F), and prices of inputs (P). There is a direct relation between total cost and output. The total cost increases with an increase in output as inputs have to be made payments. Output plays a significant role in cost as it is variable and under the control of the firm.

Apart from this, the amount of change in total cost varies from one firm to another, thought all firms may experience an increase (decrease) in cost form an increase (increase) in output but the change in total cost may differ.

Factor productivity and cost have an inverse relation. An improvement in factor productivity, other things remaining constant, decreases the amount of inputs and, therefore, results in a fall in costs. Factor productivity or efficiency depends on level of technology. Modern and efficient technology, better managerial skills, good working conditions, and a congenial industrial environment (absence of strikes and lockouts) improve factor productivity. Increase in prices of factor inputs, other factors remaining constant increases cost of production. 

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