What is the Cost Function?

A cost function is a mathematical expression or equation that shows the cost of producing different levels of output.

What we observe is that the cost increases as the firm produces higher quantities of output. This is pretty intuitive, since producing more output requires greater quantities of inputs, which cost more dollars to acquire.

What is the origin of these cost figures? They come from the production function and the factor payments.

We can use the information from the production function to determine production costs. What we need to know is how many workers are required to produce any quantity of output. If we flip the order of the rows, we “invert” the production function so it shows L = f ⎛Q⎞ .

Now focus on the whole number quantities of output.