Concept of Cost

CONCEPT OF COST

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Introduction

·       The term Cost means the aggregate of expenditure incurred by the producer in the process of production

·       In other words it is the valuation placed on the use of resources

 

Concept of Cost

There are few concepts of Cost and are as follows

1.     Fixed & Variable Cost

a.     The fixed costs are those that remain fixed, irrespective of changes in the output

b.     Example can be the insurances, salary, property tax etc

c.      The variable costs are those which vary with the output

d.     Example can be the cost of electricity, gas, fuel etc

2.     Total, Average and Marginal Cost

a.     Total cost is the aggregate of producing all the units of output

b.     Average cost is the cost per unit of output produced

c.      Marginal cost is the net addition to the total cost for producing an additional unit of output

d.     The relation between Average cost & Marginal cost is

                                                    i.     When AC is falling, the MC lies below it

                                                  ii.     When AC starts to rise, the MC will be above the AC

                                                 iii.     MC cuts the AC at the lowest point of AC curve

3.     Money Cost and Real Cost

a.     Money costs are the prices which have to be paid to the factors of production or we can say the expenses.

b.     Real cost is the sacrifices of factors made during the process of production

c.      The real cost can not be measured

4.     Explicit Cost and Implicit Cost

a.     Explicit cost refers to the making of actual payments in the process of production

b.     Implicit cost means even though work is performed there is no corresponding payment

c.      Example can be

                                                    i.     If a driver brings material to works, there is explicit cost in the form of his salary.

                                                  ii.     If the manager brings, there is no such cost as manager is not paid to drive a car

5.     Private Cost and Social Cost

a.     Private cost is the cost to the owner (Cost to Abdullah for setting his Sugar factory in Muzaffarnagar)

b.     And the Social cost is the cost that is the cost to the public (Cost to the public of Muzaffarnagar caused by the smoke and pollution from the Sugar factory)

6.     Historical Cost and Replacement Cost

a.     Historical cost is the original cost incurred by the firm while purchasing the inputs in past

b.     Replacement cost is the current cost incurred by the firm to purchase the input acquired in past

7.     Opportunity Cost

a.     Opportunity cost is the next best alternative, that can be produced instead by the same factors

b.     Or the cost of using something in a particular venture by not using it in its best alternative use

Video Description

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