Cost Concepts and More

Define/ describe the following:

1. First Cost
- The sum of the initial expenditures involved in capitalizing a property or building a project; 
includes items such as transportation, installation, preparation for service, as well as other rel
ated costs. In the context of a building, first cost includes land acquisition costs in addition to 
the cost of construction.

2. Fixed cost
- A fixed cost is a cost that does not change with an increase or decrease in the amount of
goods or services produced or sold. Fixed costs are expenses that have to be paid by a
company, independent of any specific business activities. In general, companies can have two
types of costs, fixed costs or variable costs, which together result in their total
costs. Shutdown points tend to be applied to reduce fixed costs. Examples of fixed costs
include rental lease payments, salaries, insurance, property taxes, interest
expenses, depreciation, and potentially some utilities.

3. Variable cost
- A variable cost is a corporate expense that changes in proportion to production output.
Variable costs increase or decrease depending on a company's production volume; they rise
as production increases and fall as production decreases. Examples of variable costs include
the costs of raw materials and packaging. A variable cost can be contrasted with a fixed cost.

4. Marginal cost
- Marginal cost is the additional cost incurred in the production of one more unit of a good or
service. It is derived from the variable cost of production, given that fixed costs do not
change as output changes, hence no additional fixed cost is incurred in producing another unit
of a good or service once production has already started.
5. Opportunity cost

- Opportunity costs represent the potential benefits an individual, investor, or business misses

out on when choosing one alternative over another. The idea of opportunity costs is a major
concept in economics.

Because by definition they are unseen, opportunity costs can be easily overlooked if one is
not careful. Understanding the potential missed opportunities foregone by choosing one
investment over another allows for better decision-making.

6. Sunk cost
- A sunk cost refers to money that has already been spent and which cannot be recovered. In
business, the axiom that one has to "spend money to make money" is reflected in the
phenomenon of the sunk cost. A sunk cost differs from future costs that a business may face,
such as decisions about inventory purchase costs or product pricing. Sunk costs are excluded
 from future business decisions because the cost will remain the same regardless of the
outcome of a decision.

For example, a manufacturing firm may have a number of sunk costs, such as the cost of
machinery, equipment, and the lease expense on the factory. Sunk costs are excluded from a
sell-or-process-further decision, which is a concept that applies to products that can be sold as
they are or can be processed further.

7. Market
- In common parlance, by market is meant a place where commodities are bought and sold at
retail or wholesale prices. Thus, a market place is thought to be a place consisting of a
number of big and small shops, stalls and even hawkers selling various types of goods.

In Economics however, the term “Market” does not refer to a particular place as such but it
refers to a market for a commodity or commodities. It refers to an arrangement whereby
buyers and sellers come in close contact with each other directly or indirectly to sell and buy
goods.

8. Monopoly
- The term monopoly means a single seller (mono = single and poly = seller). In economics, a
monopoly refers to a firm which has a product without any substitute in the market. Therefore, for
all practical purposes, it is a single-firm industry.
- Monopoly definition by Prof. A.J. Braff – ‘Under pure monopoly, there is a single seller in
the market. The monopolist’s demand is the market demand. The monopolist is a price maker.
Pure monopoly suggests a no substitute situation.’

9. Monopsony
- A monopsony is a market condition in which there is only one buyer, the monopsonist. Like
a monopoly, a monopsony also has imperfect market conditions. The difference between a
monopoly and monopsony is primarily in the difference between the controlling entities. A
single buyer dominates a monopsonized market while an individual seller controls a
monopolized market. Monosonists are common to areas where they supply most or all of the
region's jobs.

10. Oligopoly
- Oligopoly is a market structure with a small number of firms, none of which can keep the
others from having significant influence. The concentration ratio measures the market share
of the largest firms. A monopoly is one firm, a duopoly is two firms and an oligopoly is two
or more firms. There is no precise upper limit to the number of firms in an oligopoly, but the
number must be low enough that the actions of one firm significantly influence the others.

11. Oligopsony
 - An oligopsony is a market for a product or service which is dominated by a few large buyers.
The concentration of demand in just a few parties gives each substantial power over
the sellers and can effectively keep prices down.

12. Perfect competition

Pure or perfect competition is a theoretical market structure in which the following criteria are met:

- All firms sell an identical product (the product is a "commodity" or "homogeneous").

- All firms are price takers (they cannot influence the market price of their product).
- Market share has no influence on prices.
- Buyers have complete or "perfect" information—in the past, present and future—about the
product being sold and the prices charged by each firm.
- Resources for such a labor are perfectly mobile.
- Firms can enter or exit the market without cost.

13. Producer goods

- Producer goods, also called intermediate goods, in economics, goods manufactured and used
in further manufacturing, processing, or resale. Producer goods either become part of the final
product or lose their distinct identity in the manufacturing stream. 

14. Consumer goods

- Consumer goods are products bought for consumption by the average consumer.
Alternatively called final goods, consumer goods are the end result of production and
manufacturing and are what a consumer will see stocked on the store shelf. Clothing, food,
and jewelry are all examples of consumer goods. Basic or raw materials, such as copper, are
not considered consumer goods because they must be transformed into usable products.

15. Law of supply

- The law of supply is the microeconomic law that states that, all other factors being equal, as
the price of a good or service increases, the quantity of goods or services that suppliers offer
will increase, and vice versa. The law of supply says that as the price of an item goes up,
suppliers will attempt to maximize their profits by increasing the quantity offered for sale.

16. Law of demand

- The law of demand is one of the most fundamental concepts in economics. It works with
the law of supply to explain how market economies allocate resources and determine the
prices of goods and services that we observe in everyday transactions. The law of demand
states that quantity purchased varies inversely with price. In other words, the higher the price,
the lower the quantity demanded. This occurs because of diminishing marginal utility. That
is, consumers use the first units of an economic good they purchase to serve their most urgent
needs first, and use each additional unit of the good to serve successively lower valued ends.
17. Law of diminishing returns

- The law of diminishing returns operates in the short run when we can’t change all the factors of
production. Further, it studies the change in output by varying the quantity of one input.

Technically, the law states that as we increase the quantity of one input which is combined with
other fixed inputs, the marginal physical productivity of the variable input must eventually
decline.

In simpler words, the total productivity, for a given state of technology, is bound to increase
with an increase in the quantity of a variable input. However, as the quantity of the inputs keeps
on increasing, the marginal product rises to a maximum, then starts to decline and eventually
becomes negative.

18. Law of supply and demand

- The law of supply and demand is a theory that explains the interaction between the sellers of
a resource and the buyers for that resource. The theory defines what effect the relationship
between the availability of a particular product and the desire (or demand) for that product
has on its price. Generally, low supply and high demand increase price and vice versa. Perfect
examples of supply and demand in action include PayPal.
References

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