On the Short-Run Cost Function

Abstract

IN this communication, we consider the variables included in the short-run cost function, its various forms under different conditions, and the concept of fixed costs. By the short-run cost function we mean the array of values of total cost that will be incurred in producing different volumes of output with given plant and equipment. The layout and mode of utilization of the given plant may of course be adjusted; and the whole complex of business organization and staffing is regarded as variable., The plant is regarded as producing a single product or a complex of products produced in constant proportions. We presuppose a 'matured' technique in which the economies of learning have been worked through.' For economy in presentation we deal only with the total cost function though our conclusions apply to the whole family of its derivatives. Consider first the nature of the variables whose behavior is described by the function. The determination of the output variable or its correlative rate of plant-utilization is relatively simple. But the same cannot be said for the cost variable. In principle this variable should comprehend all costs which arise out of producing and marketing the output in question or servicing and supporting the productive and marketing organization while it is engaged in carrying on productive operations. We disregard the tendency, stimulated in part by high income taxes, to camouflage net income in kind as productive expenses. Even then we must recognize that productive activities, particularly those on the staff or management level, may be designed to yield their fruits over a succession of output periods. The resulting costs need to be allocated by essentially arbitrary decision to particular parcels of product. Formulas of allocation have been quite crude and under stress chiefly of taxation have tended to assign allocable costs wherever possible to the particular period in which the costs were incurred or obligated.' More troublesome for theoretical purposes are the so-called implicit costs which involve more or less arbitrary charges against current output on account of imputed future shrinkage in asset value or capabilities. Thiis if natternq of unstable emnlovment will imDair working