Definition of Cost: Different Types and Elements of Cost in Economics Explained

What is Cost

In Economics, Cost is the value of inputs employed to produce an output. It is the aggregate of various cost elements.

It includes the cost of materials, labour charges, rent or depreciation of tools incurred in producing the output, interest paid or foregone by employing the capital, and the value of efforts and sacrifices made by the producer in producing the output.

Cost can be defined as the monetary value of all materials, resources, and efforts involved in producing an output, along with the value of time, the opportunity foregone, and the risks involved in producing the output.

For example, to understand the elements of cost, look at the example of a housewife preparing food.

• The housewife purchases provisions and vegetables, etc. 
• She invests money in utensils, a gas stove, and gas. 
• She labours in the kitchen for hours cutting vegetables, cooking the ingredients, and doing other related tasks. 
• She employs a maid to wash dishes and pays her periodically. 
• She sweats in the kitchen instead of resting in the hall or her bedroom, watching TV or reading books. 
• Further, she risks getting cut or burning her fingers while cooking. 
• So each one of these factors, when taken in their monetary value, constitutes the cost factor of the food she prepared.

This is how the cost of any product is assessed. 

All elements taken together constitute the total cost of the product.

Types and Elements of Cost in Economics

The following are the different types of costs in economics that refer to different aspects of the cost.

• Total cost
• Fixed cost
• Variable cost
• Average cost
• Marginal cost
• Explicit cost
• Implicit cost

Now, let us have a look at the features of each and every aspect of these costs.

Total Cost

Total cost refers to the total amount of expenses incurred in producing the output, which includes the monetary value of each and every aspect mentioned in the above example of a housewife preparing food. It is the cost as a whole of the product. So, total cost constitutes all the expenses incurred in achieving the output.

Fixed Cost

Fixed cost is a more or less lump-sum cost that must be incurred irrespective of the quantity or quality of the product produced. It has no relation to the volume of output. 

For example, in the above illustration of a housewife preparing food, you can see that the stove is needed irrespective of the quantity of food to be cooked. Again, you need the utensils also for cooking. So, these are fixed expenses that are needed as a base for cooking the food. 

The risk factor and the labor are also there, which constitute fixed costs for most part of it. 

In general, fixed costs include all salaries and administrative expenses, including the value of depreciation of assets during that period. 

These are compulsory expenses incurred irrespective of production.

Here, you should note one point. The fixed cost for smaller quantities of production may be high, whereas if the production quantity increases, the fixed cost per unit decreases. 

With the same fixed expenses, you can produce more quantities up to some limits.

Variable Cost

Variable costs are variable in nature. They depend on the quantity and quality of the produce. If food is to be cooked for more people, the expenses increase, and for fewer people, they decrease. If you have to produce high-quality food, you need high-quality ingredients, which are more expensive. So, the cost depends on these factors.

In the above example of a housewife cooking food, the cost of provisions, vegetables, and gas consumption can vary depending on the quantity of food to be prepared. 

If you are cooking for four people, it will be less. But if you cook for 10 people, the total expenses will be much more. This is one variable cost example.

But, on the whole, you should note that the variable cost per unit of food may remain the same. Because the same quantity of provisions and vegetables is required per head.

Average Cost

Average cost refers to the cost per unit of production. It is derived by dividing the total cost by the number of units produced. 

Suppose in the above example of cooking food, if total expenses incurred are Rs.1,000 and the food is served to 10 people, the average cost per meal is 1000 / 10 = Rs.100 per meal. 

Or, if the total monthly expense for cooking comes to Rs.6,000, then the average cost per day is Rs.200 (6,000 / 30 days = 200). 

And if 4 people eat per day, then the average cost per head is 200 / 4 = 50.

Marginal Cost

Marginal cost is the extra amount of expenditure incurred for the addition of one unit of extra product.

Say, for example, a guest visited your home, and you cooked one more plate of meals for him. 

You had to spend on some extra rice, dal, and vegetables for him. Now, the value of these extra items is the additional expenditure incurred in cooking an extra meal. All other expenses remained the same. 

But you had to put in some more effort while cutting extra vegetables, etc. 

So, in this case, the marginal cost incurred is the value of that extra rice, pulses, vegetables, and any other extra ingredients used by you. 

This is the notion or concept of marginal cost.

Explicit Cost

Explicit means clearly and physically visible. You are seeing those expenses clearly without any doubt or misunderstanding. You will be paying the amount, can get bills for them, and enter the amounts in your records as proof of payment. 

In the above example, the cost of provisions, vegetables, utensils, and payment to your maid are all explicit costs.

Implicit Cost

Implicit means implied or understood. They can not be directly experienced. You are not making direct payments to outsiders to prove those expenses. But, you can evaluate such expenses with the aid of the prevailing market value of such expenses.

In the above-cited example of food preparation by the housewife, you can see that the gas stove and utensils are used for cooking. So, it is an element of cost. If you hire the same things from the market to cook food, you might have to pay some rent. So, that much of the rent is an implicit cost of the food. Or, you may calculate the depreciation (if the stove or utensils are too costly) and include that amount as an implicit cost, in place of rent.

So, whatever items get used in production that are not directly and completely identifiable with production, calculate the value of those items through other means of calculation. All such costs are known as implicit costs.