What do you mean by cost function, Managerial Economics

Assignment Help:

Q. What do you mean by Cost Function?

Cost function is a derived function. It's derived from the production function that describes the efficient method of production at any given time. Production function specifies the technical relationships between inputs and level of output. So cost will vary with the changes in level of output, nature of production function, or factor prices. So symbolically we may write the cost function as

C = ƒ(X, T, Pf)

Where, C = Total cost, X = Output, T = Technology, Pf   = Prices of factors.

Total cost is evidently, an increasing function of output, C = ƒ (X), ceterius paribus. Clause 'ceteris paribus' implies that 'all other factors that determine costs are constant'. If these factors change, they would affect the cost. Technology is itself determined by physical quantities of the factor inputs, quality of the factor inputs, and efficiency of the entrepreneur, both in organising the physical side of production and in making the correct economic choice of techniques. So, any change in these determinants will shift the production function and therefore will shift the cost curve. For example the introduction of a better method of organising production or application of an educational programme to the existing labour would shift the production function upwards and therefore will shift down the cost curve. In the same way, the improvement of raw material, or improvement in the use of the same raw materials will result in a downward shift of the cost function.

Because no output is possible without an input, ceteris paribus, an increase in factor prices will lead to an increase in the cost. Factor prices relies on the demand and supply of factors in the economy.

Of all the determinants of cost, cost-output relationship is considered as the most significant one. So in economic analysis cost function is analysed with respect to output. This is since the cost-output relationship is subject to faster and more frequent changes. Relationship between output and cost is analysed with respect to long-run and short-run.


Related Discussions:- What do you mean by cost function

Economic growth-harrod domar theory, Harrod Domar Theory A basic princi...

Harrod Domar Theory A basic principle that has been stressed by both Harrod and Domar in their growth models and which has been incorporated in all modern growth theories is th

Monopolistic versus perfect competition, firms both in monopolistic and per...

firms both in monopolistic and perfect competition tend to make normal profits but why do they criticize only monopolistic competition

Capital markets, CAPITAL MARKETS Markets in which financial resources ...

CAPITAL MARKETS Markets in which financial resources (money, bonds, stocks) are traded i.e. the provision of longer term finance - anything from bank loans to investment in pe

Marginal cost, A firm in a perfectly competitive market invents a new situa...

A firm in a perfectly competitive market invents a new situation of production that lowers its marginal costs.  What happens to its output? What happens to the price it charges?

Long-term policies to cure balance of payment deficits, Long-Term Policies ...

Long-Term Policies One long term option of tackling balance of payments deficit is export promotion .  In the long run this is the best method of improving a balance of payme

Resources, “Managerial economics involves use of economic analysis to make ...

“Managerial economics involves use of economic analysis to make business decisions involving the best use of a firm’s scarce resources” Explain the statement with suitable example.

Short run output and price, SHORT RUN OUTPUT AND PRICE In monopolistic...

SHORT RUN OUTPUT AND PRICE In monopolistic competition, it's the product differentiation that permits its price without losing sales.  Due to brand loyalty consumers will c

Using factor incomes for calculating national income, Using Factor Incomes ...

Using Factor Incomes for Calculating National Income     A second method is to sum up all the incomes to individuals in the form of wages, rents, interests and profits t

Inhabitants of the city , The city of Cabernet is very popular for its prod...

The city of Cabernet is very popular for its production of wine. The inhabitants of the city have an aggregate demand for wine that can be described as follows: where Q d

Marris modal, plz help tomorrow is my paper n I need help to understand thi...

plz help tomorrow is my paper n I need help to understand this topic

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