Concept and Types of Cost

len Alfred Ajibola - Thu, 09th May, 2019 @ 15:44: PM

Topics in Economics

Demand, Law of Demand and Demand Schedule Concept and Types of Cost Supply Curve, Law of Supply and Elasticity of Supply What is a Black Market, Its advantages and disadvantages Supply curve, Graphical representation of Supply Curve Scale of Preference and Opportunity Cost

Academic Questions in Economics

Please check out our Test Your Knowledge page to see all Questions and Answers

Budget 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

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

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

Concept of Cost:

Cost can be expressed in various forms.

Generally, cost will refer to money spent on a variety of things.

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 inputs are necessary if we intend to enhance our productivity. 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.

Please read on Production here.


Types of Cost

Cost can be put into the following types:

1. Accounting Cost

When an entrepreneur pays cash (money) for the needed materials of production, such money is referred to as accounting cost.

Accounting cost 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.

Please read on the Principle of Double Entry here.


2. 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 (profit) that this man would had earned if he had 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 make if an extra investment was made.

Please read on how to start a Home based Fish Farming Business here.


3. 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.

Please read on the Various Business Structures - Their Advantages and Disadvantages here.


4. Opportunity Cost

Think of opportunity cost as the income that would have been generated if the next best alternative had been taken. Let’s consider the instance below:

A man with N100 intends to buy a phone and laptop; which he intends to use for maximizing his business.

If the N100 could only purchase one of these products: (Let's assume he went with the phone); then the profit he would have made in his business if he had purchased the laptop is referred to as the opportunity cost.

Please read more on Scale of Preference and Opportunity Cost here.


5. 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.

Please read on the Advantages and Disadvantages of Division of Labour here.

Examples of fixed cost are rent and interest from loans.


6. Variable Cost

This cost is a function of output volume; that is, it will increase if output increases and decrease if output decreases.

Please read on Supply, Law of Supply and Elasticity of Supply here.

Examples of variable cost are cost of raw materials and payment of wages.


7. Direct Cost

A direct cost is a traceable cost since it can be directly linked or traced to its specific purpose.

A direct cost is always 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 is the cost of acquisition of a specific material.


8. 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.


9. Sunk Cost

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


10. 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 is considered to be an incremental cost.

Please read on Division of Labour here.


11. Private Cost

Private cost results from the implementation of a personal objective.

An instance of private cost is when an entrepreneur invests on his personal business which may come in the form of marketing, advertising or purchase of machineries.

Please read on Marketing here.


12. Social Cost

The entrepreneur do not bear this cost, rather the society takes on the responsibility.

An example of social cost will include the cost to decrease environmental pollution within an area.

Please read on Community and Volunteer Service here.

In the above instance, the entrepreneur does not incur any expense on such projects eventhough he or she lives around this area.

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Alfred Ajibola is a Medical Biochemist, a passionate Academician with over 7 years of experience, a Versatile Writer, a Web Developer, a Cisco Certified Network Associate and a Cisco CyberOps Associate.

Amazing facts in Economics


Scale of Preference can be defined as the list of a person's needs or wants written in an order of importance. 📜✍️

When you have a limited amount of money and could only buy some of the items on your list (the top items on the list); then the remaining items that you didn't buy will be generally considered as your opportunity cost.

Opportunity cost can be defined as the value of the best alternative that a person could have achieved or bought but couldn't achieve after the best choice had been achieved.

Opportunity cost are of two types

  1. Explicit Opportunity Cost
  2. Implicit Opportunity Cost

Please read on scale of Preference, Opportunity cost and the types of Opportunity cost here

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