Concepts Of Cost In Economics

Concepts Of Cost In Economics:

Cost:

The amount of expenditure incurred in making a product is called as cost or cost of production. It includes all the expenses paid by the organizer or producer like rent of land,wages of labour,interest on capital,power charges and transport charges etc.,

Types of Cost:

There are of five types of cost as follow:

1. Fixed Cost
2. Variable  Cost
3. Total Cost
4. Marginal Cost 
5. Average Cost

Fixed Cost:

The cost which does not changes with the change in output is called as fixed cost or in direct cost. It remains constant whether the output increased or decreases or even production is stopped 

Example:

Rent of the building,interest on capital,salaries of permanent staff etc.,

Variable Cost:

The cost which changes according to the change in output is called as variable cost or direct cost or prime cost. When output increases variable cost also increases, when output decreases cost also decreases, when production is stopped there will be no variable cost.

Example:

Cost of raw material, cost of wages and transportation cost.

Total Cost:

Total cost is the addition of the fixed cost and variable cost. It is obtained by adding the fixed cost and variable cost.

Marginal Cost:

It is and additional cost which is incurred in making an additional unit of output is called as marginal cost. The marginal cost is obtained by dividing the change in total cost by change in the output when output increases. Marginal cost decreases in the beginning and then increases.

Average Cost

The cost per unit output is called average cost. It is obtained by dividing the total cost by the output. when production increases the average cost decreases in the beginning and then increases.