Cost function
Topic: Production Function, Returns and Costs · NCERT: Class 12, Ch 3 "Production and Costs"
Meaning
A cost function gives the least cost of producing each level of output, for given input prices and technology. The firm is assumed to always choose the cheapest input combination for each output. Costly, wasteful combinations are left out. Every cost curve comes from the cost function, including total, average and marginal cost.
Example
A firm can make 50 units with three different mixes of labour and capital. Only the cheapest mix, at current wages and rents, is recorded in the cost function as the cost of 50 units.
Don't confuse with
- Production function: it gives the maximum output from each input combination (q = f(L, K)). The cost function works the other way round: it gives the minimum cost for each output level.