Question

Relationship between cost function and produvtion.Finction

Answer 1

How do firms decide what to produce and how much to produce? 
What factors constitute a firm�s costs? 
How do firms determine what price(s) to charge 
What determines a firm�s profit? 
What determines the shape and the position of a (firm�s) supply curve?

Business Firm 
A business firm is an economic unit engaged in the production of one of more economic goods or services. 
Applying the technology available to it, a business firm combines economic resources (factors of production) to produce one or more goods for the purpose of making profits. 
A business firm buys economic resources (inputs) and sells the goods it produces (outputs).

Production and Costs 
To produce a good or a service a firm needs economic resources or factors of production. In economics,  the factors of production used by a firm in the production of a good or a service are generally referred to as inputs. What a firm produces is called output. A firm has to pay for the inputs it needs. Therefore, inputs, on the one hand, generate costs and, on the other hand, generate output. 
We first study the relationship between inputs and the output; that is "production function". Then we look at the relationship between theoutput and costs; that is cost function. 


Note: Studying the relationship between costs and inputs without regard to the output produced from the inputs is not useful. That is why we study the relationship between costs and output.

Inputs: Factors of Production 
Factors of production: 
The primary factors of production are land and labor. 
Capital is another important factor of production. 
In economics we distinguish between physical capital and financial capital. 
Physical capital: tools,  machinery, equipment, buildings 
Note: Non-physical assets such as copy rights and patent rights are functionally similar to physical capital. 
Financial capital: Financial assets representing physical capital (stocks) or used to acquire physical capital are financial capital.

In addition to land, labor and capital businesses often use intermediate goods (raw materials and supplies) in the production process. 
Entrepreneurial Services: In market economies the function of entrepreneurs is also very important. The function of an entrepreneur is to acquire and combine all the needed factors of production to produce a good. An entrepreneur takes chances (risks) in the hope of making profits.

Cost of production is simply the sum of the costs of all inputs used in production.

Production Costs = Costs of Inputs