“COST CONCEPTS

BUSINESS ECONOMICS
Cost Concepts
• Cost Function

• Outlay and Opportunity Costs

• Explicit and Implicit Costs

• Fixed and Variable Costs

 BUSINESS ECONOMICS
Cost Concepts
• OTHER COSTS
Marginal Costs
Historical and Replacement Costs
Incremental and Sunk Costs
Controllable & Uncontrollable
Short-run & Long-run Costs
 BUSINESS ECONOMICS
Cost Analysis
Cost analysis has a key role to play
in business economics.

Cost analysis helps in comparison

between costs and revenues for
business decisions.
 BUSINESS ECONOMICS
Cost Function
Cost functions tells us about the
determinants of cost.
Cost is a function of prices of
input, the rate of output, the size of
the plant and the state of technology
and is denoted by:
C= f( F, O,P,T)
 BUSINESS ECONOMICS
Cost Concepts – Classification
Outlay & Opportunity Costs

Outlay Costs are the actual

financial expenditure of the firm
which is made as one time
investment
 BUSINESS ECONOMICS
Cost Concepts – Classification
Opportunity Costs are defined as
sacrificed alternatives where profits
derived from the next best alternative
investment that are foregone by the
firm by using the available resources
for a particular business
 BUSINESS ECONOMICS
Cost Concepts – Classification
Explicit or Out of Pocket Costs
refers to the actual money outlay of
the firm to buy or hire the productive
resources it needs for the process of
production
 BUSINESS ECONOMICS
Cost Concepts – Classification
Implicit or Book Costs refers to the
opportunity costs of the use of
factors which a firm does not buy or
hire but already owns them which do
not require current expenditure like
out of pocket costs.
BUSINESS ECONOMICS
Cost Concepts – Classification
Fixed and Variable Costs
 BUSINESS ECONOMICS
Cost Concepts – Classification

Fixed Costs are the costs spent by a

firm as a result of the use of fixed
inputs and remain constant
irrespective of the level of output.
 BUSINESS ECONOMICS
Cost Concepts – Classification

Variable Costs are those costs that

are incurred by the firm as a result
of the use of variable factor inputs.
These costs vary directly with the
level of output.
 BUSINESS ECONOMICS
Cost Concepts- Classification
• OTHER COSTS
Marginal Costs
Historical and Replacement Costs
Incremental and Sunk Costs
Controllable & Uncontrollable
Short-run & Long-run Costs
 BUSINESS ECONOMICS
Cost Concepts – Classification
Marginal Costs
Marginal costs are incurred if there is a
unitary change in output. It refers to the
additional cost incurred for producing one
more unit of output.
 BUSINESS ECONOMICS
Cost Concepts – Classification
Historical and Replacement Costs
Historical cost refers to the original
cost paid by the firm for the purchase
of plant and machinery.
Replacement cost refers to the price
that would be paid for the existing
machinery that is currently prevailing
in the market.
 BUSINESS ECONOMICS
Cost Concepts – Classification
Incremental and Sunk Costs

Incremental cost is the cost incurred by

a firm which is caused by a change in the level
of activity.
Sunk costs are those costs which once
incurred and will not be altered due to the
change in the level of business activity.
 BUSINESS ECONOMICS
Cost Concepts – Classification
Controllable and Uncontrollable Costs

Costs which are identifiable and subject to

regulation by the business executive are called
controllable costs.

Costs which are identifiable and are out of

regulation by the business executive are called
uncontrollable costs.
 BUSINESS ECONOMICS
Cost Concepts – Classification
Short-run and Long-run Costs

Short-run Costs are the costs associated with

the change in output of the firm. These costs
vary in relation to the variation in input
components only.
 BUSINESS ECONOMICS
Cost Concepts – Classification
Long-run Costs

Long-run Costs are the operating costs that

are associated with the changing scale of
production or alteration in the size of the plant
In the long-run production function the entire
factor input is variable