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   under assumptions of constant returns to scale and the existence of just one
non-produced factor of production. These are the assumptions of the so-called non-
substitution theorem. Under these assumptions, the long run price of a commodity is equal to
the sum of the cost of the inputs into that commodity, including interest charges.

Opportunity cost

‘


 is the cost related to the next-best choice available to someone who has
picked between several mutually exclusive choices.[1] It is a key concept in economics. It has
been described as expressing "the basic relationship between scarcity and choice."[2] The
notion of opportunity cost plays a crucial part in ensuring that scarce resources are used
efficiently.[3] Thus, opportunity costs are not restricted to monetary or financial costs: the real
cost of output forgone, lost time, pleasure or any other benefit that provides utility should
also be considered opportunity costs.

The concept of an opportunity cost was first developed by John Stuart Mill.[4]

= Ñ person who has $15 can either buy a CD or a shirt. If he buys the shirt the
opportunity cost is the CD and if he buys the CD the opportunity cost is the shirt. If
there are more choices than two, the opportunity cost is still only one item, never all
of them.

= Ñ person who invests $10,000 in a stock denies herself or himself the interest that
could have accrued by leaving the $10,000 in a bank account instead. The opportunity
cost of the decision to invest in stock is the value of the interest.

Fixed cost

In economics, — 


are business expenses that are not dependent on the level of goods
or services produced by the business [1] They tend to be time-related, such as salaries or rents
being paid per month. This is in contrast to variable costs, which are volume-related (and are
paid per quantity produced).

In management accounting, fixed costs are defined as expenses that do not change as a
function of the activity of a business, within the relevant period. For example, a retailer must
pay rent and utility bills irrespective of sales.

Ñlong with variable costs, fixed costs make up one of the two components of total cost: total
cost is equal to fixed costs plus variable costs

Variable cost

From Wikipedia, the free encyclopedia

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 = ‰is Total Costs are: $20 in materials + $50 of foregone pay = $70 Total Costs

Explicit cost

Ñn   

 is an easily accounted cost, such as wage, rent and materials. It can be
transacted in the form of money payment and is lost directly, as opposed to monetary implicit
costs.

Explicit cost are those which the entrepreneur has to pay from his own pocket.

Explicit costs require an outlay of money by the firm.

   


  


 




Implicit cost + explicit cost = total cost. Implicit cost is not equal to total cost, but a
component of it. Ñ simple example: Sean builds a cabinet. ‰e spends 2 hours building the
cabinet. ‰e could have been working instead and normally makes $25+hour at his job. Since
he was building a cabinet he wasn't paid for this time. The materials to make the cabinet cost
him $20.

= ‰is Explicit Costs are: $20 in materials

= ‰is Implicit Costs are: $25+hr x 2 hrs= $50 of foregone pay
= ‰is Total Costs are: $20 in materials + $50 of foregone pay = $70 Total Costs

Total cost

In economics, and cost accounting, 


 (TC) describes the total economic cost of
production and is made up of variable costs, which vary according to the quantity of a good
produced and include inputs such as labor and raw materials, plus fixed costs, which are
independent of the quantity of a good produced and include inputs (capital) that cannot be
varied in the short term, such as buildings and machinery. Total cost in economics includes
the total opportunity cost of each factor of production as part of its fixed or variable costs.

The rate at which total cost changes as the amount produced changes is called marginal cost.
This is also known as the marginal unit variable cost.

If one assumes that the unit variable cost is constant, as in cost-volume-profit analysis
developed and used in cost accounting by the accountants, then total cost is linear in volume,
and given by: total cost = fixed costs + unit variable cost * amount.

The total cost of producing a specific level of output is the cost of all the factors of input
used. Conventionally economist use models with two inputs capital, K. and labor, L. Capital
is assumed to be the fixed input meaning that the amount of capital used does not vary with
the level of production. The rental price per unit of capital is denoted r. Thus the total fixed
costs equal Kr. Labor is the variable input meaning that the amount of labor used varies with
the level of output. In fact in the short run the only way to vary output is by varying the
amount of the variable input. Labor is denoted L and the per unit cost or wage rate is denoted
w so the total variable costs is Lw. Consequently total cost is fixed costs (FC) plus variable
cost (VC) or TC = FC + VC = Kr +wL.

  

 

 is an expense which contains both a fixed cost component and a variable
cost component. The fixed cost element shall be a part of the cost that needs to be paid
irrespective of the level of activity achieved by the entity. On the other hand the variable
component of the cost is payable proportionate to the level of activity.

It shows similarities to telephone bills. One must pay line rental and on top of that a price that
depends on how heavy one is using the service. So it changes with output. Ñnother example
is satellite television. Ñ price for the box must be paid monthly and to get additional movies,
more money has to be given.

Cost of energy, such as electricity, is a good example as it is integral to production of goods

and services. This component straddles both the fixed and variable universe because
electrical power is essential for the basic operation of the business in lighting and heating -
this portion is a sunk cost that is foregone regardless of production. Ñs demand ramps up,
more energy is required to ramp up the production process in the use of machinery or large
banks of computers for instance. Cost of electrical energy will then rise accordingly as
production activities increase. Therefore, the cost of electricity can be viewed as semi-
variable.

Ñnother example is salaried employees who are also compensated by commissions. This
group is paid on a fixed salary plus they are also rewarded based on the volume of sales they
can generate, or, other forms of quantitative measures based on revenues to the firm.

Take the highest Output and costs. Take the lowest Output and costs. Take one from the other
= movement in cost per unit Calculate Variable cost per unit Put back into highest total cost
and rework variable cost to the output, leaving Fixed cost.

Cost of sales




—




 refers to the inventory costs of those goods a business has sold during a
particular period. Costs are associated with particular goods using one of several formulas,
including specific identification, first-in first-out (FIFO), or average cost. Costs include all
costs of purchase, costs of conversion and other costs incurred in bringing the inventories to
their present location and condition. Costs of goods made by the business include material,
labor, and allocated overhead. The costs of those goods not yet sold are deferred as costs of
inventory until the inventory is sold or written down in value.

Cost of living




— is the cost of maintaining a certain standard of living. Changes in the cost of
living over time are often operationalized in a cost of living index. Cost of living calculations

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 Public and Welfare economics
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In macroeconomics, the —


—


  
refers to the decrease in social
welfare, if any, caused by business cycle fluctuations.

Nobel economist 1obert Lucas proposed measuring the cost of business cycles as the
percentage increase in consumption that would be necessary to make a representative
consumer indifferent between a smooth, non-fluctuating, consumption trend and one that is
subject to business cycles.

Under the assumption that business cycles represent random shocks around a trend growth
path, 1obert Lucas argued that the cost of business cycles is extremely small[1][2] and as a
result the focus of both academic economists and policy makers on economic stabilization
policy rather than on long term growth has been misplaced.[3][4] Lucas himself, after
calculating this cost back in 1987, reoriented his own macroeconomic research program away
from the study of short run fluctuations.

‰owever, Lucas' conclusion is controversial. In particular, Keynesian economists typically

argue that business cycles should not be understood as fluctuations above and below a trend.
Instead, they argue that booms are times when the economy is near its potential output trend,
and that recessions are times when the economy is substantially below trend, so that there is a
large output gap.[4][5] Under this viewpoint, the welfare cost of business cycles is larger,
because an economy with cycles not only suffers more variable consumption, but also lower
consumption on average

— or —
 consists of actions or procedures ² especially on the part of

governments and institutions ² striving to promote the basic well-being of individuals in
need. These efforts usually strive to improve the financial situation of people in need but may
also strive to improve their employment chances and many other aspects of their lives
including sometimes their mental health. In many countries, most such aid is provided by
family members, relatives, and the local community and is only theoretically available from
government sources.[citation needed ]

In Ñmerican English, welfare is often also used to refer to financial aid provided to
individuals in need, which is called benefit(s) or welfare benefits in 3ritish English

Cost of acquisition

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cost of long run

In economic models, the 
 is the conceptual time period in which there are no fixed
factors of production. Firms can enter or leave the marketplace, and the cost (and availability)
of land, labor, capital goods and entrepreneurship can be assumed to vary. In contrast, in the
short-run time frame, certain factors are assumed to be fixed. This is related to the long run
average cost (L1ÑC) curve, an important factor in microeconomic models.

Ñ generic firm can make these changes in the long run:

= ·   
=   
=   
=    

ong-run marginal cost (
) refers to the cost of providing an additional unit of service
or commodity under assumption that this requires investment in capacity expansion. L1MC
pricing is appropriate for best resource allocation, but may lead to a mismatch between
operating costs and revenues.

In long-run equilibrium, the L1MC=ong run average total cost ( ) at the minimum of
L1ÑTC.

In macroeconomic models, the long run assumes full factor mobility between economic
sectors, and often assumes full capital mobility between nations.

The concept of long-run cost is used in cost-volume-profit analysis and product mix analysis.

Ñ famous use of the phrase was by John Maynard Keynes, who said in dry humor, "In the
long run, we are all dead."

Ñll production occurs in the short run. The long run is a planning and implementation
stage.[1][2] During the long run a firm may decide that it needs to produce on a larger scale by
building a new plant or adding a production line. The firm may decide that new technology
should be incorporated into its production process. During the long run the firm considers all
its short run production options and selects the optimal combination of inputs and technology
for the firm's purpose.[3] The optimal combination of inputs is the least cost combination of
inputs for desired level of output when all inputs are variable.[2] 1egardless once the
decisions are made and implemented and production begins the firm is operating in the short
run with fixed and variable inputs.[2][4]

The law of diminishing marginal returns does not apply in the long run.[5] The law examines
the effect on output of increaseing the use of an input while other inputs are fixed.[6] In the
long run all inputs are variable in the sense that they can be changed. The law of diminishing
returns determines the shape of short run cost curves. The shape of the long run marginal and
average costs curves is determined by economies of scale.[7]

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Direct costs are those for activities or services that benefit specific projects, e.g., salaries for
project staff and materials required for a particular project. 3ecause these activities are easily
traced to projects, their costs are usually charged to projects on an item-by-item basis.

Indirect costs are those for activities or services that benefit more than one project. Their
precise benefits to a specific project are often difficult or impossible to trace. For example, it
may be difficult to determine precisely how the activities of the director of an organization
benefit a specific project.

It is possible to justify the handling of almost any kind of cost as either direct or indirect.
Labor costs, for example, can be indirect, as in the case of maintenance personnel and
executive officers; or they can be direct, as in the case of project staff members. Similarly,
materials such as miscellaneous supplies purchased in bulk²pencils, pens, paper²are
typically handled as indirect costs, while materials required for specific projects are charged
as direct costs.

  





    

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1eal cost
The cost of producing a good or service, including the cost of all resources used and the cost
of not employing those resources in alternative uses.

Sunk cost

In economics and business decision-making,




are retrospective (past) costs that
have already been incurred and cannot be recovered. Sunk costs are sometimes contrasted
with prospective costs, which are future costs that may be incurred or changed if an action is
taken. 3oth retrospective and prospective costs may be either fixed (that is, they are not
dependent on the volume of economic activity, however measured) or variable (dependent on
volume).

In traditional microeconomic theory, only prospective (future) costs are relevant to an

investment decision. Traditional economics proposes that an economic actor not let sunk
costs influence one's decisions, because doing so would not be rationally assessing a decision
exclusively on its own merits. The decision-maker may make rational decisions according to
their own incentives; these incentives may dictate different decisions than would be dictated
by efficiency or profitability, and this is considered an incentive problem and distinct from a
sunk cost problem.

Evidence from behavioral economics suggests this theory fails to predict real-world behavior.
Sunk costs greatly affect actors' decisions, because humans are inherently loss-averse and
thus normally act irrationally when making economic decisions.

Sunk costs should not affect the rational decision-maker's best choice. ‰owever, until a
decision-maker irreversibly commits resources, the prospective cost is an avoidable future
cost and is properly included in any decision-making processes. For example, if you are
considering pre-ordering movie tickets, but have not actually purchased them yet, the cost
remains avoidable. If the price of the tickets rises to an amount that requires you to pay more
than the value you place on them, the change in prospective cost should be figured into the
decision-making, and the decision should be reevaluated.

Selling cost

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