Cost In Economics 🧾


In economics, we can divide the cost into two major categories:

  1. Fixed Cost
  2. Variable Cost

Fixed costs are classified as an expense by the company that does not fluctuate regardless of the productivity rate incline or decline of the company’s operations. Here we can include simple costs such as the cost of lease/rent on land, storage, manufacturing plant… Also, we would take into account the cost of depreciation and amortization that do not equate to capital outflow but are classified as a cost due to equipment purchased reaching its maturity as time passes by thereby reducing its future market value at which it can be sold.

Variable cost on the other hand fluctuates as the manufacturing output and sales of the company move in a specific direction. In a scenario of a company that generates increased sales thus revenue categories of the variable cost would move upwards and downwards. We have to take into account that trade agreements and various estimating/hedging principles are taken into account by the buyer and the seller which can lead to the different costs of capital for purchased raw materials, ingredients, or final products. An example of this occurrence would be forward contracts that act as privately traded contract between the supply chain members where the two parties estimate that the price of a specific good will depreciate or appreciate over a certain period. Therefore, it acts as a single-win situation or a balanced situation where buyers’ costs would be lower, higher, or equal to the predetermined price upon which the price movement provides an outcome of the contract once it meets its maturity.

A Company that experiences growth and establishes its market share on a specific or multiple markets will have the ability to purchase increased goods volume thereby being provided with an application for multiple discounts on miscellaneous assortment, a quantity discount, and promotional discount to reach increased turnover at a shorter period which benefits the supplier by providing the supplier with the ability to sell more at shorter intervals. Here we would have a positive reduction in the variable cost of the company or a slight increase while still providing higher revenue more effectively. Other variable costs are the cost of production such as electricity, water, heating, and cooling which vary on the productivity rate of the company.

Even though wages and payroll taxes are fixed costs I like to classify them as long-term fixed with variable components. This is due to the company’s motivational or labor efficiency system to stimulate working parties by providing them with a variety of benefits, one of which is increased salaries. From the perspective of payroll taxes, there would be a long-term cost but that is also subject to change depending on the macroeconomic state and the rate of development of each environment in a single economy.

Total Cost?

Total Cost TC is a sum of fixed and variable costs providing us with an understanding of the difference between total variable and total fixed cost. The general difference is classified as total fixed cost due to its non-movement factors while the variable cost will fluctuate. This is a simple way to look at the total cost. Logically, when a company generates increased revenue and acquires higher market share we expect that the company directs capital toward new machinery, land leases, equipment, and software investments which would lead to an increase in fixed cost, variable cost, and therefore the difference between the two. Also, it is very important to understand the potential return a company can generate from these particular investments and what the objective of these investments is to have a better picture of what cost to profit might be for the company in the future.

Marginal Cost?

Marginal Cost simply explains the cost input when the production output increases. In basic terms, we would expect it to rise, but from an economic standpoint, we can also expect that a company might have an absolute advantage on the market reaching economies of scale or reaching economies of scope where the cost is allocated on an increased portfolio of products, therefore, providing a price, demand utility of the company in ratio to its competitors.

To sum up, it is very important to learn constantly since it provides us with the ability to form conclusions on a more logical, rational, and objective model. This enables us to progress as individuals and gives us the ability to direct that value to the team and multiple environments.

#economy #cost #macroeconomic #supply #chain #rationality #logic

#trade #microeconomics #business #cost #profit #cost #revenue