Concept and Types of Cost

Biola Emmanuel - Thu, 09th May, 2019 @ 15:44: PM

Topics in Economics

Concept and Types of Cost Supply Curve and Elasticity of Supply What is a Black Market, Its advantages and disadvantages Supply curve explained with graphical representation Scale of Preference and Opportunity Cost

Academic Questions in Economics

QUESTIONBudget deficit refers to the amount by which _____.

  1. total expenditure exceeds revenue
  2. capital expenditure exceeds revenue
  3. recurrent expenditure exceeds revenue
  4. recurrent expenditure exceeds capital expenditure
  5. capital expenditure exceeds recurrent expenditure
  6. total expenditure exceeds capital and recurrent expenditure

ANSWER is: Capital expenditure exceeds revenue

Budget Deficit can be described as a financial situation when the expenditures exceed the revenues.  

Generally, Budget Deficit relates to the government’s expenditure where capital expenditure or spending exceeds the money generated by the government (revenue).

Note: Budget deficit does not apply to an individual or business spending.

Capital expenditure made by government involves spending on physical assets like educational structures, roads, bridges, power grids, hospital buildings and equipment.

Note: Capital expenditure is usually long term and thus, does not have to be renewed each year


QUESTION: What are infant industries in Economics?

  1. They are industries that are allowed enough time to mature for recognition
  2. They are industries that produce baby foods in addition to mother care products
  3. They are industries that are too young to compete in a thriving society
  4. They are industries that are constantly introducing new products
  5. They are industries that are under a parent company
  6. They are industries located in rural areas

ANSWER is: They are industries that are allowed enough time to mature for recognition

In economics, an infant industry is a newly established industry, which in its early stages experiences relative difficulty, thus making it difficult to compete with established competitors abroad.

An infant industry will need to be given enough time for its growth and recognition


QUESTION: Which of the theory did Malthus became popular for?

  • A. Population may outgrow the means of subsistence
  • B. The people will eventually decide not to have children
  • C. The death rate may become so high that people may not be able to produce
  • D. Migration of people from one place to another may leave the world barren
  • E. All of the above

ANSWER is: Population may outgrow the means of subsistence

Thomas Robert Malthus is an English Cleric and Scholar who is popularly known for his Malthusian Theory of Population. By his own words, He stated that:

By nature, human food increases in a slow arithmetical ratio; man himself increases in a quick geometrical ratio unless want and vice stop him.

Image Credit: En.Wikipedia


Concept of Cost:

The term “cost” can be expressed in various forms. Generally, it will refer to money spent on a variety of stuffs. Below are some of the ways we may have spent money:

  • Money paid to rent.
  • Money paid for power and fuel.
  • Money paid to workers and labourers.
  • Investing our money and so on.

Recall that both the physical and financial input is necessary if we intend to enhance our productivity. Please read our article on production HERE. Based of this fact, it will be a good idea if entrepreneurs and those intending to start a business understand the concept of cost analysis; and this is what this article is about.


Cost can be put into the following types:


Accounting Cost 

When an entrepreneur pays cash (money) for the needed materials for production, such money is referred to as accounting cost. This money may be paid in the following ways

  • Money paid as rent.
  • Money paid for the purchase of raw materials.
  • Money paid for electricity.
  • Money paid to workers and so on.

Note: In Most cases, accounting costs are regarded as expenses and will be recorded in the credit side of an account. Read our article on the principle of double entry HERE.


Economic Cost

Consider this scenario. A man had a shop and intends to invest on the sale of phones; but he feared the risk involved in the business. As a result, he did not make the investment. The money that this man would had earn if he invested in the phone business is referred to as economic cost. Similarly, one person may decide to help the needy while another may choose to invest the money instead of helping the needy. If the latter made some profit in his investment and decides to help the needy with the profit, then that’s economic cost. Consider economic cost as a means of helping the entrepreneur to make supernormal (higher) profits, that is, the extra profit he would have made if an extra investment had been made.


Outlay Cost

Outlay costs are considered as expenditure in a business. The expenditure may come in the form of rent and wages. In a business, the outlay cost are generally treated as expenses.


Opportunity Cost

Think of opportunity cost as the income that would have been generate if the next best alternative had been taken. Let’s consider this instance: A man with N100 intends to buy a phone and laptop. If the N100 could only purchase one of these products (assuming he intends to maximize the products for the profit of his business). If this man went with the phone, then the profit he would have made if he had purchased the laptop is referred to as the opportunity cost. Please read our article on opportunity cost and scale of preference HERE


Fixed Cost

These are costs that don’t change regardless the volume of output. This cost will always remain constant even if there is a significant increase or decrease in output. Examples are rent and interest from loans.


Variable Cost

This cost is a function of output volume, that is, it will increase if output increases and decrease if output decreases. Examples of variable cost are cost of raw materials and payment of wages.


Direct Cost

A direct cost is a traceable cost since it can be directly linked or traced to its specific purpose. A direct cost will always be easily identifiable. One will need to know the purpose of a cost before concluding whether it’s direct or indirect. An example of direct cost may be the cost of acquisition of a specific material.


Indirect Cost

An indirect cost is not easily identifiable or traceable or linked to its specific purpose. For instance, this could be the cost of electricity if you don’t know how your electricity is measured.


Sunk Cost

As the name imply, they are forgone cost that cannot be recovered. An example is the money spent on advertising or research.


Incremental Cost

Incremental cost is incurred each time a change had been made. For instance, the cost made on software upgrade or machinery upgrade as a result of an increase in the number of customers.


Private Cost

Private cost results from the implementation of a personal objective. An instance is when an entrepreneur invests on his personal business which may come in the form of advertising or purchase of machineries.


Social Cost

The entrepreneur do not bear this cost, rather the society takes on the responsibility. This may include the cost to decrease environmental pollution within an area. The entrepreneur does not incur any expense on such projects eventhough he or she lives around this area.

Amazing facts in Economics


Economics isn't just about money. It isn't just about economizing or efficiency or prudence at management. In simple terms, Economics is a science that deals with the study of scarcity and choice.

Economics have 2 main branches. They are

  • Microeconomics
  • Macroeconomics

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