cost function


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cost function

a function that depicts the general relationship between the COST of FACTOR INPUTS and the cost of OUTPUT in a firm. In order to determine the cost of producing a particular output it is necessary to know not only the required quantities of the various inputs but also their prices. The cost function can be derived from the PRODUCTION FUNCTION by adding the information about factor prices. It would take the general form:

Qc = f (p1 I 1 , p2I2, …,pn In)

where Qc is the cost of producing a particular output, Q, and p1, p2, etc., are the prices of the various factors used, while I 1, I2, etc., are the quantities of factors 1, 2, etc., required. The factor prices p 1, p2, etc., which a firm must pay in order to attract units of these factors will depend upon the interaction of the forces of demand and supply in factor markets. See EFFICIENCY, ISOCOST LINE, ISOQUANT CURVE.

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