Cost function, Microeconomics

Costs: If raw materials, machines and other things required for production could be made available freely then the study of the theory of the production and indeed, the study of economics would be useless! However, a firm has to incur costs of all kinds which demand serious attention.

• Cost Function : A cost function expresses the relation between total cost and the cost minimizing level of output. Mathematically, C = C(y) where y is the optimal output level.

• Short Run: In the short run there are 2 kinds of costs - fixed costs and variable costs. Fixed costs are the costs of the fixed factors and do not change with the changes in the level of output produced. Variable costs, which are the cost of the variable factors, change with the change in the production level.

C(y) = TC = TFC + TVC, where TC is total cost, TFC is total fixed cost and TVC is total variable cost.

If K and L are the fixed and variable factors respectively, whose prices are r and w then

TC = wL + rK.

Since L depends on the output produced,

TC = wL(y) + F where F is a constant.

878_Cost Function.png

In the above graph note the following features:

i. When y = 0, TFC = F, TVC = 0, TC = F.

ii. The vertical distance between TC and TVC remains constant and is equal to F.

iii. As y rises, TVC increases and so does TC.

Posted Date: 3/13/2013 12:49:36 AM | Location : United States







Related Discussions:- Cost function, Assignment Help, Ask Question on Cost function, Get Answer, Expert's Help, Cost function Discussions

Write discussion on Cost function
Your posts are moderated
Related Questions
Energies of the diametric molecules of a gas, chemistry assignments The analysis basis for treating these different types of motion can be seen by describing the motion of a di

Explain about the deadweight loss and elasticitie s. Deadweight Loss and Elasticities The general rule for economic policy is the other things equivalent; you need to choose

Pre-Funded Pension: A pension plan in that funds are invested and accumulated throughout an individual's working life in order to pay for subsequent disbursement of pension benefit

A Period of Deterioration: The entire period was very difficult for India's BOP, partly because of slow growth of exports in relation to import requirements and partly because

Risk Aversion and Income - Variability in potential payoffs increases risk premium. - Example: A job has a .5% probability of paying $40,000 (utility of 20) and a 5 p

INDIVIDUAL DEMAND * Price Changes - Using figures developed earlier, the impact of a change in price of food can be shown by using indifference curves.  Effect of Price

What do you mean by the utility function? The Utility Function: Sometimes this is easier to work directly along with the preference relation and its connected sets. Althou

Question : (a) Using a simple example, diffrence between inter - industry trade and intra - industry trade? (b) Illustrate the reasons for the existence of external economie

The Bloomington Electric Company operates in a stable industry and therefore has predictable dividend growth of 8% per year. The most recent annual dividend was paid yesterday in t

diagram of extension and contraction in demand?