Costs

Costs are the resources that must be given up or expended to produce goods or deliver services. In economics, they include explicit monetary outlays as well as implicit opportunity costs—the value of the next best alternative foregone. Understanding costs helps assess feasibility and guide decisions.

Costs are commonly classified by how they respond to output. Fixed costs remain the same regardless of production in the short run, while variable costs change with quantity. Total cost equals fixed plus variable cost. Average cost is total cost divided by output, and marginal cost is the change in total cost from producing one more unit.

Costs can be viewed from accounting or economic perspectives. Accounting costs record actual expenditures; economic costs include both accounting costs and the opportunity costs of resources owned or supplied by the firm. Sunk costs are past outlays that cannot be recovered and should not affect current choices.

Cost behavior influences business decisions. Economies of scale occur when higher output lowers average cost, while diseconomies raise it. The marginal cost curve typically intersects the average total cost curve at its minimum. Managers use cost data for budgeting, pricing, and evaluating efficiency, including break-even analysis and cost-plus pricing.

In policy and welfare analysis, costs are often weighed against benefits. Public costs include private costs plus negative externalities or social costs borne by others. Cost-benefit analysis formalizes this comparison to appraise projects or regulations.