Cost refers to the total expenses incurred in the production of a commodity. Cost analysis refers to the study of behaviour of cost in relation to one or more production criteria, namely size of output, scale of production, prices of factors and other economic variables. The functional relationship between cost and output is expressed as ‘Cost Function’.
A Cost Function may be written as
C = f (Q)
Eg. TC = Q3–18Q2 + 91Q + 12
where, C=Cost and Q=Quantity of output. Cost functions are derived functions because they are derived from Production Functions. We shall discuss the basic cost concepts and their behaviour below.