Economic Cost

Cost refers to the financial expenditure required to purchase or produce a good or service. This is often called the economic cost. In economics, cost typically refers to the production cost, which is the expense of creating a good. The total amount spent to produce a certain quantity of goods or services is known as the total cost. Meanwhile, the average cost is the cost per unit, calculated by dividing the total cost by the number of units produced. The cost depends on the production process, organizational structure, and technology used in manufacturing the good. Costs are generally divided into two main categories:

• Fixed cost. Fixed cost is the production expense that remains constant, regardless of how much is produced. This includes costs like machinery, production facilities, and invested capital. In the short term, fixed costs remain unchanged whether the business is producing or not.
• Variable cost. Variable cost, however, fluctuates with production levels. Examples include raw materials and labor. In the short term, variable costs rise and fall in direct relation to production volume.

From an accounting perspective, costs can also be classified as direct or indirect, depending on whether they can be attributed to a single cost object or multiple ones.

• Direct cost. A direct cost is one that can be directly assigned to a specific cost object. This is typically an expense related to a particular production line.
• Indirect cost. An indirect cost applies to two or more cost objects. For example, the expense of a company’s administrative structure is a shared cost and is allocated across all production lines.

In economic theory, the concepts of marginal cost and average cost are particularly important.

• Marginal cost. Marginal cost refers to the change in total cost that occurs when the quantity produced is altered. In marginalist theory, marginal cost is used to determine the optimal level of production.
• Average cost. Average cost is the ratio of total production cost to the quantity produced. The average cost curve typically forms a U-shape.

From a business perspective, cost represents the portion of revenue that excludes profit (see profit). For instance, when products are sold at cost price, it means they are being offered at the price required to cover their production costs. On the other hand, products sold below cost are being offered at a price lower than their production cost.

Difference between cost and expenditure. From the consumer's point of view, cost is sometimes used synonymously with expenditure when referring to the purchase of goods and services. However, technically speaking, cost differs from both expenditure and price. Expenditure refers to the money spent to acquire a specific good or service, while price is the market value of that good or service.