Cost and Cost curves


Concept of cost:

In order to produce goods and services, a firm uses raw materials and factors of production which are called inputs. The expenditure incurred by these inputs is called cost. Cost of production is a component of determining the profit of a firm. At a certain price of a commodity, the low cost of production results in high profit and high cost of production results in low profit or loss.
There are various kinds of cost. Some of them can be explained as follows:

  • Fixed cost:

      Fixed cost includes the expenses incurred by the fixed factors of production. They are those factors which cannot be changed in the short run. The cost incurred by the fixed factor of production remains constant at all levels of outputs. It includes rent of the business premises, interest on capital, salaries of permanent employees, depreciation of machines and furniture, etc. It is also known as an overhead cost.

  • Variable cost:

Variable cost includes the expenses incurred by the variable factors of production. They are the factor that can be changed in accordance with the change in production even in the short run. It includes the cost of raw materials, the wage of workers, cost of power and fuel, etc. If the quantity of production increases the cost will increase and vice versa. When the output is zero, the variable cost will be zero.

  • Short run cost:

   The short run is a time period in which the firm can vary its output by varying only the amount of variable factors such as labor and raw materials. In the short run, fixed factor such as capital, equipment, top-level management, etc can not increase its output by enlarging the existing plant and building.

  • Long run Cost:

The long run is a time period in which all the factor of production is variable. Thus, in the long run, the output can be increased by increasing fixed factors of production like a plant, machinery,  building, etc as well as variable factors.

  • Explicit Cost: 

An explicit cost is an immediate installment made to others throughout maintaining a business. For example, wage, lease, and materials. The actual cost, likewise called as Real Cost is the cost really acquired by the firm to make all the physical installments and the legally binding commitments.
In this way, all the cash costs recorded in the books of records are, for down to earth purposes, the real or explicit cost. This cost goes under the bookkeeping cost idea, as all the physical and effortlessly unmistakable costs caused are recorded in the bookkeeping books, which are then later examined to decide the productivity with which the firm is working.

  • Implicit Cost:

An Implicit cost is any cost that has just happened however isn't really appeared or announced as a different cost. The Implicit or certain or ascribed, or imputed cost can be named as a cost which comes about because of utilizing the advantage for one's own particular use as opposed to leasing or offering it, or the salary is inevitable of not deciding to work.

The best case for implicit cost would be an opportunity cost. The credited cost isn't considered while figuring the profit or loss of the firm, yet be that as it may, is vital to choose whether or not to proceed with the factor in its present use. The implicit cost is utilized to ascertain the economic profit. The economic profit is the contrast between the aggregate income produced less aggregate cost.

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