Introduction to Economics

Assignment No 02
Chapter No 08
Submitted To:
Miss Iram Shahzadi
Submitted By:
Abubakar Murtaza
Submission Date:
3-1-2023 (Tuesday)
Cost:-
It is a commonly accepted fact that physical inputs or resources are
Important for enhancing production. We, however, tend to miss out on
The financial aspect of this rule. In production, research, retail, and
accounting, a cost is the value of money that has been used up to
produce something or deliver a service, and hence is not available for use
anymore. In business, the cost may be one of acquisition, in which case
the amount of money expended to acquire it is counted as cost.
Nature of Cost:-
 Costs are incurred as a result of production
 Economist define cost in term of opportunities that are sacrificed
when a choice is made. Therefore economic costs are simply
benefit lost.
 Accountant defines cost in term of resources consumed.
Accounting cost reflect changes in stocks (reduction in good things
increase in bad things) over a fixed period of time.

Types of Cost:-
The following types of cost are as follows;
 Accounting Cost & Economic Cost
 Outlay Cost & Opportunity Cost
 Direct/Traceable costs and Indirect/Untraceable costs
 Incremental costs and Sunk costs
 Private costs and Social costs
 Fixed costs and Variable costs
Cost of Opportunity Cost:
Opportunity costs represent the potential benefits that an individual,
investor, or business misses out on when choosing one alternative over
another. Because opportunity costs are unseen by definition, they can
be easily Overlooked. Understanding the potential missed opportunities
when a Business or individual chooses one investment over another
allows for better decision making.
Opportunity Cost Formula:
Opportunity Cost = Total Revenue – Economic Profit
𝑊ℎ𝑎𝑡 𝑜𝑛𝑒 𝑠𝑎𝑐𝑟𝑖𝑓𝑖𝑐𝑒
Opportunity Cost =
𝑊ℎ𝑎𝑡 𝑜𝑛𝑒 𝑔𝑎𝑖𝑛

Production & Cost:

Production costs refer to all of the direct and indirect costs businesses
face
From manufacturing a product or providing a service. A business firm is
an organization, owned and operated by private individuals, that
specializes in production. Production is the process of combining inputs
to make outputs. The firm buys inputs from households or other firms
and sells its output to consumers
Profit of the firm = sales revenue – input cost
Various measures of Cost:
Total cost, fixed cost, and variable cost each reflect different aspects of
the cost of production over the entire quantity of output being
produced. These costs are measured in dollars. In contrast, marginal
cost, average cost, and average variable cost are costs per unit.
To earn profits, the total revenue of the company must exceed the total
cost of production. The various types of cost which contribute to the
total cost of production are as follows:
1. Total Costs
2. Fixed Costs
3. Variable Costs
4. Average Costs
5. Marginal Costs
Short & Long Run:
 Variable cost includes the cost of the variable inputs, and changes
with change in output.
 Fixed cost doesn’t change with change in output, as it includes the
cost of inputs fixed in the short run.
 Total cost is the sum of the fixed cost and variable cost.
 In the long run, all costs are variable costs.
 Example: pricing at Dell
 Example: Egg prices likely to rise amid laws mandating cage-free
hen houses.