ABSTRACT
Production activity requires costly inputs, both fixed and variable. Variable inputs such as labor and raw materials generate variable costs while fixed inputs that do not change with the level of output such as the number of telephone lines and salaried managers generate fixed costs. It is in the interest of a profit maximizing firm to produce a given level of output in the cheapest way possible. A cost function encapsulates the expenses of operating a technology, the least cost of producing any output level given the prices of all inputs. The objective is to produce any level of output as cheaply as possible. However, with two inputs, it may be possible to lower costs by substituting a relatively more expensive input with a cheaper one. Therefore, in general, the cost-minimizing input demands depend on their prices in addition to the output level; they are known as conditional input demands.
