Determinants of Short Run Cost

- The relationship among the production function and cost can be exemplified by either increasing returns and cost or decreasing returns and cost.

- Increasing returns and cost

• With the increasing returns, the output is increasing relative to input and variable cost and total cost will fall relative to the output.

- Decreasing returns and cost

• With the decreasing returns, the output is decreasing relative to input and variable cost and total cost will increase relative to output.

For Example: Assume that the wage rate (w) is fixed relative to number of workers hired.

Then: 



In conclusion: