COST CONCEPTS

I INTRODUCTION
C = f (O)
The relation between cost and output is
called “Cost Function”.
Cost Analysis can be discussed in two parts
A. Traditional Approach of Cost Curves
B. Modern Approach of Cost Curves
 COST CLASSIFICATION
 Costs are classified as :
 Money cost
 Opportunity Cost
 Real Cost
 Private, External and Social cost
 Money Cost
 Ordinarily, the term cost of production
refers to the money expenses in the
production of a commodity.
 The amount spent in terms of money to
produce a commodity , is called its money
cost.
 Examples include Cost of Raw materials,
Interest, Wages, Rent etc.
 Real cost
 Real costs refer to those payments which
are made to factors of production to
compensate for the total sacrifices and
efforts in rendering their services.
 The concept of real cost, however, does
not carry any significance in the cost of
production because it is a subjective
concept.
 Private, External and Social cost
 Sometimes, there is a difference between the
cost incurred by a firm and the cost that must
be incurred by the society as a whole.
 For ex, a factory may dispose of its untreated
waste into a river or a lake. Such a method of
waste disposal may minimise the private cost,
but it does impose a cost to the society in the
form of polluted water ways.
 A cost that is not borne by the firm, but is
incurred by others in society is called an external
cost.