Last modified on July 12, 2016, at 12:41


Costs are negative rewards associated with a choice. Typically, rational actors will choose to incur costs in order to obtain rewards of a greater magnitude.

Accounting Costs

Accounting costs refer to money-costs of a transaction:
Nominal cost is the cost in the prevailing currency of the time and place.
Real cost is nominal cost adjusted for inflation, or changes in the price of money.

Economic Costs

Economic costs are composed of accounting costs and the corresponding opportunity cost. These are the costs which matter in economic decisions and economic analysis.

Costs in Firm Decisions

When analyzing rational choice by firms, the following costs are considered:

Total cost.
Average cost, or total cost divided by quantity.
Marginal cost, or the first derivative of total cost with respect to quantity.

Fixed cost (and average fixed cost), referring to costs in the short run which must be incurred regardless of quantity produced.
Variable cost (and average variable cost), referring to costs which are incurred on a per-unit basis. In the long run, all costs are variable.

Social Costs

Social costs comprise private costs and the effect of any externality generated by the act of producing a good.