c9251 - This PDF is a selection from an out-of-print volume...

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This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research Volume Title: The Relation of Cost to Output for a Leather Belt Shop Volume Author/Editor: Joel Dean Volume Publisher: NBER Volume ISBN: 0-87014-447-2 Volume URL: http://www.nber.org/books/dean41-1 Publication Date: 1941 Chapter Title: Theories concerning Static Short-Run Cost Functions Chapter Author: Joel Dean Chapter URL: http://www.nber.org/chapters/c9251 Chapter pages in book: (p. 4 - 8)
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L and average cost under a given set of operating conditions (adjustable budgets) , (2) the additional cost that must be incurred if output is increased by a small amount. Nor is managerial interest in a statistical analysis of cost behavior confined to its immediate usefulness for fore- casting purposes; the techniques used here have a wide applicability in the control of costs and in price policy. Rigorous empirical investigations of cost designed to compare statis- tical results with the cost behavior prescribed by economic theory have not been numerous. This is to be attributed to the difliculties of obtaining confidential cost data and of linding firms that meet the requirements specified in the underlying cost theory, i.e., single product, unchanging technical methods, unchanging equipment, etc. Although each industry and enterprise offers its own peculiar problems, the case study reported in this paper illustrates the results that can be obtained by statistical analysis of accounting records as well as the problems encountered in determining these results. It is hoped that this description and illustra- tion of analytical methods that have proved valuable in several similar investigations will stimulate research in an area that has both scientific and practical importance. 1 Theories concerning Static Short-Run Cost Functions In the hope that this paper may reach some non-economist readers, we first summarize the fundamentals of short-run cost theory to clarify the basis of later discussion. Underlying the whole discussion of cost theory is the notion of a cost function a function that shows the relation be- tween the magnitude of cost and of output. The existence of such a func- tion is postulated upon the following assumptions: (i) there is a fixed body of Plant and equipment; (2) the prices of input factors such as wage rates and raw material prices remain constant; () no changes occur in the skill of the workers, managerial efficiency, or in the technical methods of production. It is the shape of this cost function that is of primary inter- est in both the theoretical and statistical parts of this paper. Money expenses of productioii depend UOfl the prices and quantities of the factors of production used. Since prices are assumed to remain unchanged, the shape of the cost function will be determined by the physical quantities of the factors used up at different levels of operation. And since these
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c9251 - This PDF is a selection from an out-of-print volume...

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