Abstract
Cost is an economically relevant summary of a firm’s production possibilities. Marginal, avoidable, average, and average avoidable cost provide particularly useful economic information about how firms’ production possibilities interact with revenue opportunities to generate market price, quantity, profit, and welfare outcomes. The connection between returns to scale and monotone average cost is explored, and the elasticity of scale is defined as a local measure of returns to scale. Subadditive cost is defined as the relevant concept for determining when productive efficiency is achieved by one firm. Elasticity of substitution is defined and related to cost and profit. The envelope relationship between short- and long-run cost makes their marginal costs equal and short-run marginal cost steeper at a long-run optimal input plan. Price-taking behavior regarding output quantities leads to marginal cost as the supply relationship for prices at or above average avoidable cost.
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