MGT405 Lecture Notes - Lecture 12: Production Function, Diminishing Returns, Marginal Cost
Document Summary
12. 1 introduction: 2 shot run cost - output relations. The cost-output relationship plays an important role in determining the optimum level of production. Knowledge of the cost-output relation helps the manager in cost control, profit prediction, pricing, promotion etc. The relation between cost and output is technically described as the cost function. The production function combined with the prices of inputs determines the cost function of the firm. Considering the period the cost function can be classified as (a) short-run cost function and (b) long run-cost function. In economic theory, the short-run is defined as that period during which the physical capacity of the firm is fixed, and during which output can be increased only by using the existing capacity more intensively. The long-run is a period during which it is possible to increase the firm"s capacity or to reduce it in size, if trade is very bad.