COST

in common usage, the monetary value of goods and services that producers and consumers purchase. In a basic economic sense cost is the measure of the alternative opportunities foregone in the choice of one good or activity over others. This fundamental cost is usually referred to as opportunity cost. For a consumer with a fixed income, the opportunity cost of purchasing a new home appliance may be, for example, the value of a vacation trip foregone, or of several suits of clothes unbought. More conventionally, cost has to do with the relationship between the value of production inputs and the level of output. Total cost refers to all the expense incurred in reaching a particular level of output; if such total cost is divided by the quantity produced, average or unit cost is obtained. A portion of the total cost known as fixed coste.g., the costs of building rental or of heavy machinerydoes not vary with the quantity produced and, in the short run, cannot be altered by increasing or decreasing production. Variable costs, like the costs of labour or raw materials, change with the level of output. An aspect of cost important in economic analysis is marginal cost, or the addition to the total cost resulting from the production of an additional unit of output. A firm desiring to maximize its profits will, in theory, determine its level of output by continuing production until the cost of the last additional unit produced (marginal cost) just equals the addition to revenue obtained from it. Lastly, a distinction can be made between social and private costs. Only private costs are registered through the price system; for example, a producing firm pays the costs of such inputs as labour and machinery, but society bears the costs of damage done to the environment by the production process.