2) a)

Social Cost

The social cost is the cost associated with the company's operation, but it is not explicitly borne by the
company, rather it is the cost to society because of the production of a commodity. In the social cost-
benefit analysis of the overall impact of business operations on society as a whole, social costs are used
and do not normally appear in business decisions.

Private Cost

The Private Cost is the cost of the company's operation and is used in the business choices' cost-benefit
analysis. The firm itself is responsible for these costs. The private cost is the actual cost of carrying out
the day-to-day activities of the company, such as the costs involved in producing and consuming the
product. For a company, private costs are all the actual costs incurred, both implicit (depreciation,
interest, insurance, etc.) and explicit (raw materials, wages, rent, salaries, etc.).

Sunk Cost

Sunk cost, a cost that has already been incurred in economics and finance and which cannot be
recovered. Sunk expenses are treated as past in economic decision-making and are not taken into
account when deciding whether to continue an investment project.

Implicit costs

Implicit costs are the perceived or estimated loss of revenue from the undertaking and the action, but
they do not actually transfer money and are not recorded in the balance sheets of the accounting
system.

Economic cost

Economic cost looks at the gains and losses of one versus another course of action. In terms of time,
money as well as resources, it does this. The term also includes determining the gains and losses that by
taking another course of action could have occurred.

Unlike accounting costs, economic costs involve opportunity costs, which only take into consideration
the amount of money spent.

Economic cost is the cost of accounting (explicit cost) plus the price of opportunity (implicit cost).
Implicit expense relates to the financial value of what an organization foregoes because of a choice it
has made.

3) a)

Fixed costs are those that do not vary with output and typically include rents, insurance, depreciation,
set-up costs, and normal profit. They are also called overheads.

Variable costs are costs that do vary with output, and they are also called direct costs. Examples of
typical variable costs include fuel, raw materials, and some labor costs.
An example

Consider the hypothetical example of a boat building company below. The total fixed cost, TFC, includes
the premises, machinery and equipment required to build ships, and is £ 100,000, regardless of how
many ships are produced. As output increases, total variable costs (TVC) will increase.

Total fixed expenditure

The curve is a horizontal line on the cost graph, given that total fixed costs (TFC) are constant as output
rises.

Total Costs of Variable

At an accelerating rate, the total variable cost (TVC) curve slopes up, reflecting the law of decreasing
marginal returns.

Total Cost

By adding total fixed and total variable costs, the total cost (TC) curve is found. Its position represents
the amount of fixed costs, and variable costs are reflected in its gradient.

3) b)

The additional cost incurred in the production of one more unit of a good or service is marginal cost. It is
derived from the variable cost of production, given that fixed costs do not change as output changes, so
no additional fixed cost is incurred once production has already started to produce another unit of a
good or service.

At first, marginal costs tend to fall, but rise rapidly as marginal returns to the variable factor inputs begin
to decrease, making it more costly to employ the marginal factors. This is referred to as the 'law of
marginal returns decreasing'.

In economic theory, marginal costs are important because a profit maximizing firm will produce up to
the point where marginal cost (MC) is equal to marginal revenue (MR).

The supply curve of a company is also effectively the portion of the MC curve above the average variable
cost (from point B upwards, on the diagram below). Below this point, a firm will not supply as it will not
cover its opportunity cost. Point B is also known as the point of shut-down. The break-even point
represents point A.