Cost

Cost is the value of resources sacrificed to obtain a good or service. In economics, costs include both monetary outlays and nonmonetary sacrifices such as time or forgone alternatives. Costs influence production decisions, pricing, and welfare analysis.

Costs are categorized as explicit costs (out-of-pocket payments) and implicit costs (opportunity costs of resources owned by the firm). In the short run, costs are divided into fixed costs (do not vary with output, such as rent) and variable costs (change with output, such as materials). The total cost is the sum of fixed and variable costs; average cost is total cost divided by quantity; marginal cost is the change in total cost with respect to a one-unit change in output. Sunk costs are costs that cannot be recovered and should not affect future choices. Direct costs are attributable to a cost object, while indirect costs support multiple activities.

Cost concepts inform market decisions: economies of scale occur when average cost falls as output rises, while diseconomies raise it. Cost curves underpin analysis of profit, break-even points, and shutdown decisions. In accounting, costs are tracked using cost accounting systems to determine cost of goods sold and product costs, aiding budgeting and performance evaluation.

Beyond production, costs matter in public policy and personal finance, where cost-benefit analysis compares monetized costs and benefits of alternatives. The term cost is distinct from price: price is what buyers pay; cost is what producers must bear, though the two are linked through supply and demand.