Implications for the shape of cost function, Managerial Economics

Assignment Help:

Q. Implications for the shape of cost function?

A cost function is also a mathematical relationship, one which relates the expenses an organisation incurs on the quantity of output it generates and to the unit prices it pays. Arithmetically, let E denote the expense an organisation incurs in production of output quantity Y when it pays unit prices (p1... pn) for the inputs it uses. Then cost function  C(y, p1, ...,  pn) describes the minimum expenditure essential to produce output quantity Y when input unit prices are  (p1,...,  pn), given the technology in use and so E ≥ C(y, p1,...,pn). A cost function is an increasing function of (y, p1,..., pn), though the degrees to which minimum cost increases with an increase in the quantity of output produced or in any input price relies on the aspects describing the structure of production technology. For illustration, scale economies enable output to expand faster than input usage. Or we can say, proportionate increase in output is larger than proportionate increase in inputs. Such a situation is also referred as elasticity of production in relation to inputs being greater than one scale economies so create an incentive for large-scale production and by analogous reasoning scale diseconomies create a technological deterrent to large-scale production. For another instance, if a pair of inputs is a close substitute and unit price of one of the inputs increases, resulting increase in cost is less than if two inputs were poor complements orsubstitutes. Lastly, if wastage in the organisation causes actual output to fall short of maximum possible output or if inputs are misallocated in light of their respective unit prices, then actual cost exceeds minimum cost; both technical as well as allocative inefficiency are expensive.

As these illustrations suggest, under fairly general conditions shape of the cost function is a mirror image of shape of the production function. So the cost function and production function normally afford equivalent information concerning the structure of production technology. This equivalence relationship between cost functions and production functions is called 'duality' and it states that one of the two functions has certain aspects if and only if, the other has certain aspects. Such a duality relationship has some significant implications. Since production function and cost function are based on different data, duality allows us to use either function as the basis of an economic analysis of production, without fear of attaining conflicting inferences. Theoretical properties of associated input demand and output supply equations may be inferred from either theoretical properties of the production function or more easily for those of the dual cost function.


Related Discussions:- Implications for the shape of cost function

Write about international economic integration, Write about International e...

Write about International economic integration of the Republic of Moldova

Gatt & wto, introduction, evaluation,principle, activities concept behind G...

introduction, evaluation,principle, activities concept behind Gatt & wto

What statistical method used to estimate economic variable, Statistical tec...

Statistical technique used to estimate economic variable Some statistical techniques are used to estimate economic variables of interest to a manager. In a number of cases, sta

Economics for accountants, Economics for Accountants A few teachers an...

Economics for Accountants A few teachers and some students have questioned the rationale for including economics in a course of study for professional accountants. In order to

Economic situations or decisions, Imagine of these concepts (markets, elast...

Imagine of these concepts (markets, elasticity, production, costs, market structures).  Take one or two of those concepts and use it to examine and understand economic situations o

Classification of taxes, CLASSIFICATION OF TAXES Taxes can be classifi...

CLASSIFICATION OF TAXES Taxes can be classified on the basis of: a.     Impact of the taxes It means on whom the tax is imposed.   On the other hand, incidence of the

Marris managerial enterprise model, Why do the managers in marris model max...

Why do the managers in marris model maximise their satisfaction by choosing a higher growth rate and a lower valuation ratio when compared to the profit maximisation

International commodity agreements, International Commodity Agreements (ICA...

International Commodity Agreements (ICAS) International Commodity Agreements (ICAS) represents attempts to modify the operation of the commodity markets so as to achieve vario

A cost-push inflation , A cost-push inflation have as a result of workers' ...

A cost-push inflation have as a result of workers' attempts to push up their wages. Thus, inflation does not have to be monetary phenomenon." Is this statement true, false, or unce

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd