Cost Concepts

Cost of production can be defined as the expenses incurred in the production of a commodity by a firm. The rewards in the form of rent, wages, interest and profit given to the factors of production form the cost of Production.

Types of Cost: 

    1.  Explicit cost:  refers to cost incurred on payment made for the purchase of factors of production, for the production of a good.  It includes rent wages, payment for raw materials, interest, expense on transport, advertisement etc.

2. Implicit Cost:  are cost of self owned and self employed resources.

3.   Opportunity Cost:  refers to the cost of next best alternative sacrificed in order to produce that good.

4. Real cost:  refers to all efforts, services and sacrifices made in the production of a commodity.

5.   Private Cost: also called money cost refers to cost incurred by a firm in the production of a commodity.  It includes wages, expenses on material, electricity, rent, transport, insurance premium, tax etc.

6.    Social Cost:  refers to the cost of producing good to the society as a whole.  For example, deforestation causes soil erosion, flood , pollution caused by factories vehicles etc.