Question

Giving examples, explain the meaning of cost in economics. 

Answer 1

Cost in economics includes the following two components. 

1. Expenditures incurred or payments made by a firm to various factors of production and non factors of production- In the process of production a firm hires various factors such as land, labour, capital and entrepreneur. In return of the services provided by the factor of production, the firm makes payments to them. Labour is given wages, rent is paid for the land; interest is paid for the capital and profit for the entrepreneur. Such payments made are a cost for the firm. Besides, a firm also uses various non-factors of production such as raw material. Payments made to such non-factors are also included in the cost for the firm.
2. Opportunity Cost- Cost in economics also includes the opportunity cost. When the resources are allocated towards the production of one good, the production of some other good needs to be sacrificed. It is the cost of producing one good in terms of sacrificing the production of another good is known as the opportunity cost. Such opportunity cost is also included as a cost in economics.