What Is a Linear Cost Function?

Cost function refers to the correlation between cost and output under the condition that the technical level and factor price are unchanged. Cost theory mainly analyzes cost functions. The cost function is different from the cost equation. The cost function refers to the relationship between cost and output. The cost equation refers to the cost equal to the sum of the input factor prices. If labor L and capital K are input, the prices are PL and PK Then the cost equation is C = L · PL + K · PK, the cost equation is an identity equation, and the cost function is a function equation whose variable is output.

Cost function

cost

Here is a specific example.

The cost curve and production curve in economic analysis have a very neat correspondence:

1. Total production curve and total cost curve:

With the increase in the input of variable factors, the total output increases first and then decreases. Correspondingly, as the output increases, the total cost increases first and then gradually.

2. Marginal production curve and marginal cost curve:

Cost function

With the increase in labor input, the marginal output increases first and then decreases. Correspondingly, as output increases, marginal costs decrease first and then increase. The variable factor input that maximizes the marginal output corresponds to the output with the lowest marginal cost.

3. Average production curve and average variable cost curve:

As labor input increases, average output increases first and then decreases. Correspondingly, as output increases, the average variable cost decreases first and then rises. The amount of variable factor input that maximizes the average output corresponds to the output with the lowest average variable cost