COSTS OF PRODUCTION AND THE PRODUCTION FUNCTION

Costs of Production depend on:

1. The prices of inputs used in production
2. Production efficiency ("Productivity"): the rate at which inputs get converted into outputs

Stated differently, Costs of production are:

1. Directly proportional to the prices of inputs
2. Inversely proportional to the productivity of inputs

Take the following example, to calculate Labor Cost of Production:

Wage Rate = $12/hour
Productivity Rate = 3 units/hour

Labor Cost per unit = $12/hour (divided by) 3 units/hour = $4/unit

Fixed inputs: Cannot be changed within the time horizon of the current production cycle (short run) and are responsible for Fixed Costs.

Variable inputs: Can be changed within the time horizon of the current production cycle (short run) and are responsible for Variable Costs.

The Production Function: relates inputs to outputs.

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