Cost Of Production

• Total Cost = Fixed Cost + Variable Cost
• Fixed Cost = expenses that don't change with production (e.g. rent, salaries, insurance)
• Variable Cost = expenses that change with production (e.g. raw materials, labor, utilities)
• Explicit costs = direct costs (e.g. rent, utilities, fuel)
• Implicit costs = opportunity costs of using owned resources (e.g. forgone rent)
• Understanding both types of costs is important for pricing and profitability.

$COST - PRICE - CHARGE$

<aside> 💡 $TOTALCOST = FIXEDCOST + VARIABLECOST$

</aside>

<aside> 💡 $TotalCost = ExplicitCost + ImplicitCost$

</aside>

• Explicit cost is the direct cost
  • Payments which are visible
  • E.g.
    • Utility bills
    • Fuel cost
• Implicit Cost is the cost of self owned resources
  • Indirect cost
  • It is not visible
  • Forgone rent (Implicit)
  • Implicit is also termed as opportunity cost / economic cost
• Variable Cost
  • Cost changes with the level of output
  • E.g.
    • Salary
    • Fuel
    • Bills
• Fixed Cost
  • Fixed cost does not change with the levels of output (Q)
  • E.g.
    • Cost of Infrastructure
    • Cost of equipment / machinery

Understanding The Cost Of Production

Total Product