Cost estimation – this topic parallels the topic of demand estimation in many ways, in terms of examining the nature of the process involved in cost estimation. Different types of cost scenario are described, explaining the differences between short-run, long-run and learning curve situations. The implications for appropriate model specification are explained, along with the interpretation of different mathematical forms. Cost elasticities and their relationship to returns to scale are discussed. For different scenarios the nature of empirical studies is described, the method of estimation using regression analysis is explained, and the problems of estimation and the implications in terms of managerial decision making are discussed. As with other topics, case studies are important in illustrating the application of principles to real-life situations. Three case studies are presented, all involving recent data from major industries where digital applications are important: banking, airlines and electricity generation.

This topic examines relationships between inputs and outputs in the production process. The starting point is the explanation of various concepts that are fundamental in production and costs: factors of production, fixed and variable factors, short and long run, scale, productivity and efficiency. The increasing importance of intangible factors is discussed, along with their main features of scalability, sunkenness, spillover effects and synergy. Production functions can take various mathematical forms. The significance of average and marginal product is explained. The concepts of the law of diminishing returns, isoquants, economies of scale, diseconomies of scale and returns to scale are introduced and interpreted. The determination of the optimal use of factors of production is explained, using mathematical analysis. Case studies play an important role in this topic in terms of demonstrating the application of theoretical concepts to real-life situations, particularly in a digital age where intangible assets and network effects are important. The leading case study relates to the so-called ‘productivity puzzle’, and various explanations of the puzzle are presented.

This chapter is devoted to price formation and price trends in commodities. The chapter first discusses factors determining price levels, both in the short and long run. It thereafter turns to the blurred nature and instability of the short-run supply curve. The third focus is on price fluctuations in commodities, both the short-run instability as well as the long-run price trends. Fourth, alternative trading arrangements and their implications for price formation are explored. The final sections of the chapter discuss actual price quotations and the implications of exchange rates on commodity prices.