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Showing posts from September, 2010

Cost of Production

Cost of production of the firm will change with the changes in its output. The relation between cost and output is called “cost function”. The cost function of the firm depends upon the production function and the prices of the factors used for production. How much costs the firm will incur on production depend on the level of output. Moreover, the quantity of a product that will be offered by the firm for supply in the market will depend to a great degree upon the costs of production incurred on the various possible level of output. Short Run and Long Run Costs (Variable and Fixed Costs) Short run is a period of time within which the firm can vary its output by varying only the amount of variable factors, such as labor and raw materials. In the short run, fixed factors such as capital, equipment, building, top management personnel etc. cannot be varied. The short run is a period of time in which only variable factors can be varied (if level of output increases, the costs of var