A Further Note on the Cost Implications of Fluctuating Demand

Abstract

Presence of a variable market demand function for a given product has significant implications for factor input levels and for the resulting production costs to the firm. In a recent paper, McKean argues that in order to describe the costs of producing a product subject to fluctuating demand it is necessary to take into account the entire distribution of outputs as it relates to the static total cost function. While it is evident that influences on costs and factor inputs will differ in the case of a fluctuating demand schedule compared to the conventional stable demand conditions of classical micro theory, it is not clear that the use of a static cost function in conjunction with a probability distribution of outputs is the proper framework in which to examine the problem.