Cost Definition
The term ‘cost’ can refer to a variety of different things in business. In general, though, cost is the amount of money that a company spends in order to produce a good or service. This can include the cost of materials, the cost of labor, and other overhead costs.
There are a few different ways to think about cost. First, there is the concept of opportunity cost. This is the idea that when a company chooses to produce one good or service over another, they are forgoing the opportunity to produce something else. For example, if a company decides to make widgets instead of gadgets, they are giving up the chance to make gadgets. The opportunity cost is the value of the gadgets that were not produced.
Another way to think about cost is in terms of sunk costs. Sunk costs are costs that have already been incurred and cannot be recovered. For example, if a company buys a piece of equipment for $1,000 and it breaks after one year, the $1,000 is considered a sunk cost because there is no way to get that money back.
Finally, there is marginal cost. Marginal cost is the additional cost associated with producing one more unit of output. For example, if it costs a company $10 to produce 10 widgets, then the marginal cost of producing an 11th widget would be $11 (the extra $1 being the marginal cost).
