A production function tells us how much output a firm can produce with its existing plant and equipment.
Introduction Cost Analysis
A production function tells us
how much output a firm can produce with its existing plant and equipment. The
level of output depends on prices and costs. The most desirable rate of output
is the one that maximizes total profit that is the difference between total
revenue and total cost.
Entrepreneurs pay for the input
factors- Wages for labour, price for raw material, rent for building hired,
interest for borrowed money. All these costs are included in the cost of
production. The economist’s concept of cost of production is different from
accounting.
This chapter helps us to
understand the basic cost concepts and the cost output relationship in the
short and long runs. Having looked at input factors in the previous chapter it
is now possible to see how the law of diminishing returns affect short run
costs.
Tags : Managerial Economics - Cost Analysis
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