Cost Function:

Definition:
The cost function is a function of input prices and output quantity. Its value
is the cost of making that output given those input prices.

A common form:
c(w1, w2, y) is the cost of making output quantity y using inputs that cost w1 and w2
per unit.

Short Run Cost Functions

In the short run, one or more inputs are fixed, so the firm chooses the
variable inputs to minimize the cost of producing a given amount of output.

Long Run Cost Functions

The Long Run Cost Function describes the least-cost method of producing a
given amount of output. The "Long Run" part of the cost function means that all
inputs are variable.

Example
In the simple case, you'd consider capital and labor. In the long run, both capital
and labor may be adjusted. In the short-run, however, capital may not be adjusted.
(You can't buy and install new machinery by next week, or sell a factory and be
moved out.) You can, however, hire new employees to start work tomorrow.

Long run and short run cost functions

In the long run, the firm can vary all its inputs. In the short run, some of these
inputs are fixed. Since the firm is constrained in the short run, and not constrained
in the long run, the long run cost TC(y) of producing any given output y is no
greater than the short run cost STC(y) of producing that output:

TC(y)  STC(y) for all y.

Now consider the case in which in the short run exactly one of the firm's inputs is
fixed. For concreteness, suppose that the firm uses two inputs, and the amount of
input 2 is fixed at k. For many (but not all) production functions, there is some
level of output, say y0, such that the firm would choose to use k units of input 2 to
produce y0, even if it were free to choose any amount it wanted. In such a case, for
this level of output the short run total cost when the firm is constrained to use k
units of input 2 is equal to the long run total cost: STC k(y0) = TC(y0). We generally
assume that for any level at which input 2 is fixed, there is some level of output for
which that amount of input 2 is appropriate, so that for any value of k,

TC(y) = STCk(y) for some y.

Example of long run and short run cost functions

Example: a production function in which the inputs are perfect substitutes

Consider the production function F (z1, z2) = z1 + z2, in which the inputs are perfect
substitutes. The long run total cost function for this production function is given by
w1y  if w1 < w2
TC(y,w1,w2) = wy  if w1 = w2 = w
w2y  if w1 > w2
Its short run total cost of production when the amount of input 2 is fixed at k is
STCk(y) = w2k  if y k
w1(y  k) + w2k  if y > k.
Note that in this case if w1 < w2 then there is no level of output for which short run
total cost is equal to the long run total cost. In this case the firm would like to use
only input 1 to produce any output, so if k > 0 there is no output for which the short
run total cost is equal to the long run total cost. The short and long run cost
functions in this case are shown in the following figure.

Cost Analysis:
Definition:
Accumulation, examination, and manipulation of cost data for comparisons and
projections.