We first examine the cost of firms in the period when capital is fixed to understand the importance of marginal cost in the determination of profit maximizing output. We do this by deriving cost functions from production functions. Definition: the set of all maximum possible outputs from a given input or inputs that provide a technologically feasible way to produce a commodity or service. Q = f(xo, x1, x2, x3, x4, xn) where xi represents the inputs into production. We simplify this by dividing the inputs into capital (k) and labour (l) to get. Definition: a business organization producing goods and services from resource inputs. The firm connects costs and output as the smallest unit of production. Definition: all the firms that produce a given good or service. Definition: the period in which one factor (input) is fixed. Definition: the period in which all factors are variable. Definition: inputs that vary in quantity with each additional unit of output.