COST ANALYSIS

INTRODUCTION
CONCEPTS
COST FUNCTION
THEORIES OF COST
INTRODUCTION
The firms decision on profit maximizing
output depends on the behavior of its costs as
well as on the behavior of its revenue . A firms
cost of production is commonly thought of as
its monetary expenses. In order to produce a
good, every firm make use of various factor
and non-factor inputs.in common parlance the
amount spend on the use of these inputs is
called cost of production.
Concepts of cost
Money cost
Real cost
Accounting cost or business cost
Opportunity cost
Economy cost
Social cost
Private cost
Explicit cost
Implicit cost
Money cost
The amount spend in terms of money for
the production of a commodity is called
money cost. Ordinarily the term cost is
used for money cost.
The terms money cost includes the
following expenses: wages paid to the
labor, interest on loans, rent paid for
premises
Real cost
The mental and physical efforts and
sacrifices undergone with a view to
producing a commodity are its real
cost. In other words, real cost refers
to the pains, the discomfort and
disutility involved in supplying the
factors of production by their owners.
Accounting cost or business cost

Accounting cost refer to cash payments

which firms make for factor and non
factor inputs, depreciation and other
book keeping entries.
Out of pocket expenses or costs refer to
costs that involve immediate payment to
outsiders.
Opportunity cost
The doctrine of opportunity cost is extremely
important in economic analysis. We know that
the cost is the value of inputs used in the
process of production. An inputs has got value
because it is scarce or limited. If we use the
inputs to produce one good, it is not available
to produce something else. The opportunity
cost is the cost of next best alternative
foregone. It is also called alternative cost.
Economic cost
In economic analysis, economic cost
includes both accounting cost and
opportunity costs of self owned and self
employed resources.

Thus ,the accounting cost refers only to

explicit cost while economic costs refer both
to explicit costs as well a implicit cost.
Social cost
The social cost is the total cost to society of an
economic activity. The economic organization of
every society is characterized by certain social costs
such as pollution and noise which are not taken by
firms in determining their price levels. Social cost is
the opportunity cost to society rather than just one
firm or individual.

In other words, social cost is the cost incurred by the

whole society for producing a commodity.
Private cost
Private cost is the cost incurred by an
individual firm for producing a commodity. It
includes both the explicit cost as well as
implicit cost.
One of the major reasons why social costs differ
from the observed private costs is the
existence of external costs. In short, private
cost is equal to social costs minus external cost
Explicit cost
Many inputs are bought or hired by
the firm. The monetary payments
which a firm makes to those
outsiders who supply lab our
services, material, fuel,
transportation services, power and
so forth are called explicit costs.
Implicit cost
Many inputs are self owned and
self employed by the firm. The
firm does not have to make any
payment for them to anyone, but
it
Cost function
A firms cost function is the functional relationship
between its cost and its output. The firms production
function and the prices it pays for its inputs
determine the firms cost function. Since the
production function can pertain to the short run or
the long run, it follows that the cost function can also
pertain to the short run or the long run. The short run
is defined to be that period of time in which at least
one or some of the firms inputs are fixed and some
are variable.
Thank you
By :- KANIKA RANA and
Ina SHARMA

(BBA) 2 YEAR