Starter

An economist and an accountant

walk into a bar, both start explaining
what is meant by costs.

Explain what the economist would

say and explain what the accountant
would say
 Lesson title: Costs lesson 1

Lesson objective: What are the differences between economic

costs and costs
Lesson outcomes:

To be able to explain what is meant by opportunity cost of production

To be able to calculate the difference between costs and economic
costs
To be able to identify and explain fixed costs and variable costs
Understanding costs in economics On your whiteboards

Before we begin, let’s recap.

Explain what is meant by opportunity cost

Opportunity cost is the next best alternative forgone when making a

choice.
Understanding costs in economics On your whiteboards

Explain why economists refer to ‘economic cost’ of production in terms

of opportunity cost of production

It is the value that could have been generated had the resources been
employed in their next best use.

What are some of the examples of resources that go into the

production process?
Key term
Imputed cost: The opportunity cost incurred during the period when an
asset is employed for a particular use rather than a different use
Example – opportunity cost of labour
A market trader working on her own account
may calculate she has made £50 in profit.

However, this may not include the value of

her own time. For example, if she could have
earned £40 working in another job for the
day, then her economic profit is only……

£10. Therefore, the opportunity cost of her

labour must also be considered.
Other examples of opportunity cost in
production
Explain the opportunity cost of production for one of the following
examples:

1. Financial capital (investments)

2. Depreciation of physical capital
3. Brand reputation
Economists vs accountants
Economists differ in their use of the word ‘cost’ from accountants and
others. Accountants have outlined specifically what is a cost and what is
not a cost. These are costs we are more familiar with.
Question 1
Question 1 – answers (self assess)
Types of costs: Fixed and variable
The first type of costs we’re going to be looking at are fixed costs and
variable costs

Fixed costs (also known as indirect cost or overhead) are costs that do
not vary with the level of output produced. As production levels
change, fixed costs will remain constant.
Variable costs (also known as direct cost or prime costs) are costs that
do vary with the level of output produced. As production levels change,
variable costs will change.
Fixed costs

Examples of fixed costs include…

Variable costs

Examples of variable costs include…

Semi- variable costs
It’s not always as simple to identify whether a cost is fixed or variable.
Many costs are semi-variable costs.

For example, labour tends to be a semi- variable cost. Permanent

salaried staff would be considered a fixed cost. However, some firms
might ask permanent staff to do overtime, or they may hire temporary
workers during busier times like Christmas.
IMPORTANT- Short run vs long run
In the short run, at least one factor of
production is fixed and cannot be
changed. Therefore, in the short run,
some costs are fixed whilst others will be In any production process of
variable. your choice, explain which
factors of production would be
fixed and give a reason why.

In the long run, all factor inputs can vary,

so in the long run, all costs will be
variable costs.
Question 2
Question 2 – answers (self assess)
Exam style
MCQ