270 MICROECONOMICTHEORY
9.2. Short-run cost function of the firm
The cost function of the firm can be considered either for a short
period of time or for a long period of time. In the short run some
inputs are fixed and some are variable. On the other hand in the
long run all inputs are variable.
In the short run production can be increased by employing more
of the variable factors of production. But fixed factors of production
cannot be changed. Suppose a firm is producing one output using
two inputs. Of the two inputs X, and X, suppose that the amount
of X, is constant at a certain level x,°. Only X, can be changed
to produce more or less of output. Here X
is a variable factor
of production while X, is a fixed factor of production. Here the
amount of X, will depend on the amount of output (g) to be produced
i.e., x,
=
x, (g). Let r, and r, be the fixed prices of the two
inputswhich the firm takes as given. Total cost equation of the firm
is then given by C= rx(q)+ r,X
In the short run we have the production function q=
. (1) and the cost eqation C= r,x, + r,
f(x,x,) x,.. (2).
In these two equations we have three unknowns q, x, and C. Hence
we cannot solve for them. Instead we can eliminate x, from the
above two equations and we can geta relation between Cand q. This
relation is the short-run cost function of the firm. In other words
from equation (1) we can express x, as a function of q. Putting
this value of x, in (2) we can express Cas a function of g. It can
be written as C= T,x, (q)+ r,x,. It is the short-run cost function
of the firm.
Thus short-run total costs have two components : one component
depends on the level of output while the other component is always
fixed and independent of the level of output. That component which
depends on the level of output is known as the total variable cost
(TVC) while that component which is independent of the level of
output is called total fixed cost (TFC). Thus TC= TVC+ TFC. In
our example r,x(q) depends on q. Hence it represents TVC.Ôn
the other hand r,x; is fixed and independent of q. It represents
TFC.
Let TVC= (g), TFC = Fand TC= C. C= ¢ (q) + F
