Short-Run Cost Functions: Electricity Generation
Another study by Johnston of the costs of electric power generation in Great
Britain developed short-run cost functions for a sample of 17 different firms from
annual cost-output data on each firm. To satisfy the basic conditions underlying
the short-run cost function, only those firms whose capital equipment remained
constant in size over the period were included in the sample. The output variable
was measured in kilowatt-hours (kWh). The cost variable was defined as the
“ working costs of generation” and included: (1) fuel; (2) salaries and wages; and
(3) repairs and maintenance, oil, water, and stores. This definition of cost does
not correspond exactly with variable costs as long as maintenance is scheduled so
as to just offset wear and tear from use. Each of the three cost categories was de-flated using an appropriate price index. A cubic polynomial function with an addi-tional linear time trend variable was fitted to each of 17 sets of cost-output
observations.