... lowest possible cost. Firms must also consider those inputs it can alter (variable factors) and those which it cannot (fixed factors). This is largely dependent on the time scale involved. There are two time periods most relevant to the analysis of a firms production process: the short run and the long run. The short run is when at least one factor of production is fixed. The long run is a period of time in which the quantity of all inputs can be varied, but technology must be fixed. The initial step for a firm when trying to find the optimal combination of the factors of production is via a production function. A production function shows the highest level of output the firm can produce from a given combination of inputs. (Katz & Rosen, Microeconomics). In setting up a production function for a firm in the short run, it is important ...

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