Economics

Concept and Types of Cost

len Alfred Ajibola - Thu, 09th May, 2019 @ 3:44 PM

Topics in Economics

Advantages of Inflation Disadvantages of Inflation Concept of Inflation in Economics Scheme of work for Economics, SS1, First Term Scheme of work for Economics, SS1, Second Term Scheme of Work for Economics, SS1, Third Term Functions of the Wholesaler Advantages and Disadvantages of the Wholesaler Wholesale Market: Who is a Wholesaler? Characteristics of the Wholesaler Retail Market: Who is a Retailer and Examples of Retailers Market: Types of Market Market - What is a Market in Economics? Elasticity of Supply: Types of Supply Elasticity Supply Elasticity: Elasticity of Supply explained Demand Schedule - Types of Demand Schedule Demand: What is Demand? Law of Demand Concept and Types of Cost Supply, Supply Curve and Law of Supply What is a Black Market, Its advantages and disadvantages


Academic Questions in Economics

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

A _____ market provides a platform whereby job seekers link up with employers in an attempt to be hired.

  • A. Wholesale market

  • B. Bond market

  • C. Physical market

  • D. Virtual market

  • E. Factor Market

  • F. Labor Market

Which of the following is not a type of market based on commodities bought and sold?

  • A. Wholesale market

  • B. Bond market

  • C. Physical market

  • D. Virtual market

  • E. Factor Market

  • F. Labor Market

According to economists, a market refers to a/an _____ comprising of various buyers and sellers carrying out business transactions.

  • A. Place

  • B. Location

  • C. Entire area

  • D. Online platform

  • E. Avenue

  • F. Axis

Primary market is a type of market based on _____.

  • A. Market structure

  • B. Demand

  • C. Supply

  • D. Commodities bought and sold

  • E. Channel of distribution

  • F. Internet and world wide web

Pice elasticity of supply - Len Academy

The above diagram on the quantity supplied against a change in price is _____.

  • A. Elastic

  • B. Inelastic

  • C. Perfectly Elastic

  • D. Perfectly Inelastic

  • E. Zero Elastic

  • F. Unitary Elastic

The rate at which an increase in the price of a product translate into the product's increased production and availability in the market is termed _____.

  • A. Demand

  • B. Supply

  • C. Demand Elasticity

  • D. Supply Elasticity

  • E. Demand Curve

  • F. Supply Curve

Concerning demand curve, which of the following statement is incorrect?

  • A. It is a graphical represention of a table showing the price of commodities and quantity demanded

  • B. It can be an individual demand curve

  • C. The x-axis shows the price of commodities

  • D. The price and quantity demanded are expressed on different axis of the graph

  • E. It can be a market demand curve

  • F. All the options are correct

A table that shows the price of a commodity and the quantity demanded is termed _____.

  • A. Price table

  • B. Demand table

  • C. Demanded-price table

  • D. Demand preference table

  • E. Demand graph

  • F. Demand schedule

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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 for 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.

You can 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 also an economic cost.

 

3. Outlay Cost

Outlay costs are considered as expenditure in a business. The expenditure may come in the form of rent, wages and salaries.

In a business, outlay costs 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.

From the above instance, 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.

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.


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Amazing facts in Economics


NOTABLE POINTS IN Economics

Below are definitions of demand from the perspective of some notable professors:

The demand for goods is a schedule of the amounts that buyers would be willing to purchase at all possible prices at any one instant of a time.

Professor Mayers

Demand is the various quantities of goods that would be purchased per time period at different prices in a given market.

Professor Hibdon

The demand for anything, at a given price is the amount of it which will be bought per unit of time at the price.

Professor Benham

Generally, demand is defined as the willingness of a person, buyer or consumer to buy a specific quantity of goods or service at a given price and time.

From the above definitions, we can infer that the definition of demand is referenced to three major factors. These are:

  1. Quantity of Goods Demanded

  2. Price

  3. Time

Please read more on the concept of demand here.

In economics, we have various types of cost. These are:

  • Accounting cost

  • Economic cost

  • Outlay cost

  • Opportinity cost

  • Fixed cost

  • Variable cost

  • Direct cost

  • Indirect cost

  • Sunk cost

  • Incremental cost

  • Private cost

  • Social cost

Please read the explanations on the aforementioned types of cost here

A Black market is said to take place when there is illegal buying and selling of goods and services.

Black markets usually take place outside the government's rader and without government's knowledge so as to avoid tax or any other government regulations.

Black market presents the avenue for government prohibited goods like hard drugs, war weapons and firearms to be bought by criminals.

A black market can also occur on the web for cyber criminals or those who are involved in computer hacking. To achieve their malicious aim, these individuals will go into the dark web and purchase or rent their respective hacking tools for a fee. Normally, payments are made in crypto currencies.

However, a black market isn't generally considered as bad. Infact, it has its advantages and disadvantages.

Please read more on black market here

Below are some advantages of black market:

  • Goods and services are sold at a cheaper price.

  • It helps some people make plenty of money.

  • The illegal sales of human organs, for example, the sale of human kidneys have aided in saving some lives.

  • Some people actually depend on black market for their daily bread.

  • Some of the proceeds from black market may be utilized towards the economic growth of a nation. For instance, schools and hospitals had been built with money made from black market.

The law of supply states that:

The quantity of the supplied services or goods will increase as the price increases and they will decrease as the price decreases provided all other factors remain constant.

These constant factors are very important when stating the supply law. They include:

  • The price of input resources

  • The kind of technology used during production

  • The number of suppliers

  • The number of buyers; and so on.

 

A graph that shows the relationship between the price of a product or service, and its quantity supplied is the supply curve.

Supply curve can be defined as a graphical representation of the direct relationship between the prices of goods and services and the quantity supplied (of such goods and services) within a particular period of time provided all other factors remain constant.

Len Academy - Supply CurvePlease read more on the law of supply and supply curve here