In production, research, retail, and accounting, a cost is the value of money that has been used up to produce something or deliver a service, and hence is not available for use anymore. In business, the cost may be one of acquisition, in which case the amount of money expended to acquire it is counted as cost. In this case, money is the input that is gone in order to acquire the thing. This acquisition cost may be the sum of the cost of production as incurred by the original producer, and further costs of transaction as incurred by the acquirer over and above the price paid to the producer. Usually, the price also includes a mark-up for profit over the cost of production.
More generalized in the field of economics, cost is a metric that is totaling up as a result of a process or as a differential for the result of a decision.[1] Hence cost is the metric used in the standard modelingparadigm applied to economic processes.
Costs (pl.) are often further described based on their timing or their applicability.
Real cost definition at Dictionary.com, a free online dictionary with pronunciation, synonyms and translation. Typically, home buyers will pay between about 2 to 5 percent of the purchase price of their home in closing fees. So, if your home cost $150,000, you might pay between $3,000 and $7,500 in closing costs. On average, buyers pay roughly $3,700 in closing fees, according to a recent survey.
Each of those inputs has a cost to the firm. The sum of all those costs is total cost. We will learn in this chapter that short run costs are different from long run costs. We can distinguish between two types of cost: explicit and implicit. Explicit costs are out-of-pocket costs, that is, actual payments. Wages that a firm pays its employees. Wage inequality is on the rise for both genders. Within that range, the gap between men and women remains a hot-button issue despite gains by women in the past three decades. Broadly, the ratio of median earnings for women increased from 0.56 to 0.78 between 1970 and 2010. Bureau of Labor Statistics.
Types of accounting costs[edit]
In accounting, costs are the monetary value of expenditures for supplies, services, labor, products, equipment and other items purchased for use by a business or other accounting entity. It is the amount denoted on invoices as the price and recorded in book keeping records as an expense or asset cost basis.
Opportunity cost, also referred to as economic cost is the value of the best alternative that was not chosen in order to pursue the current endeavor—i.e., what could have been accomplished with the resources expended in the undertaking. It represents opportunities forgone.
In theoretical economics, cost used without qualification often means opportunity cost.[2]
How much cash do bank vaults contain? A small branch bank (supermarket) has “only” tens of thousand. A major big city bank could have a few hundred thousand. A federal reserve depository (federal agency), which feeds all the banks in the country, can have billions (with a “b”). By “cash reserve,” you apparently mean vault cash, the currency the bank has in its vaults or its automatic teller machines. In that case, and if it has no reserve deposits at the central bank, the reserve ratio is 133.3%. Apparently this bank is not very interested in lending. I wonder how long it will stay in business? A safe deposit box is a secured, personalized vault within a banking institution designed to enable people to store a variety of valuable possessions. This type of secured storage has very few regulations are far as laws are concerned in regard to contents. There are some caveats that can come along with the storage of cash within a safe deposit box, however. How much real money is kept in a banks vault.
Comparing private, external, and social costs[edit]
When a transaction takes place, it typically involves both private costs and external costs.
Private costs are the costs that the buyer of a good or service pays the seller. This can also be described as the costs internal to the firm's production function.
External costs (also called externalities), in contrast, are the costs that people other than the buyer are forced to pay as a result of the transaction. The bearers of such costs can be either particular individuals or society at large. Note that external costs are often both non-monetary and problematic to quantify for comparison with monetary values. They include things like pollution, things that society will likely have to pay for in some way or at some time in the future, even so that are not included in transaction prices.
Social costs are the sum of private costs and external costs.
For example, the manufacturing cost of a car (i.e., the costs of buying inputs, land tax rates for the car plant, overhead costs of running the plant and labor costs) reflects the private cost for the manufacturer (in some ways, normal profit can also be seen as a cost of production; see, e.g., Ison and Wall, 2007, p. 181). The polluted waters or polluted air also created as part of the process of producing the car is an external cost borne by those who are affected by the pollution or who value unpolluted air or water. Because the manufacturer does not pay for this external cost (the cost of emitting undesirable waste into the commons), and does not include this cost in the price of the car (a Kaldor-Hicks compensation), they are said to be external to the market pricing mechanism. The air pollution from driving the car is also an externality produced by the car user in the process of using his good. The driver does not compensate for the environmental damage caused by using the car.
Cost estimation[edit]
When developing a business plan for a new or existing company, product, or project, planners typically make cost estimates in order to assess whether revenues/benefits will cover costs (see cost-benefit analysis). This is done in both business and government. Costs are often underestimated, resulting in cost overrun during execution.
Cost-plus pricing, is where the price equals cost plus a percentage of overhead or profit margin.
Manufacturing costs vs. non-manufacturing costs[edit]
Manufacturing costs are those costs that are directly involved in manufacturing of products. Examples of manufacturing costs include raw materials costs and charges related to workers. Manufacturing cost is divided into three broad categories:
- Direct materials cost.
- Direct labor cost.
- Manufacturing overhead cost.
Non-manufacturing costs are those costs that are not directly incurred in manufacturing a product. Examples of such costs are salary of sales personnel and advertising expenses. Generally, non-manufacturing costs are further classified into two categories:
- Selling and distribution costs.
- Administrative costs.
Other costs[edit]
A defensive cost is an environmental expenditure to eliminate or prevent environmental damage. Defensive costs form part of the genuine progress indicator (GPI) calculations.
Labour costs would include travel time, holiday pay, training costs, working clothes, social insurance, taxes on employment &c.
Path cost is a term in networking to define the worthiness of a path, see Routing.
See also[edit]
References[edit]
- ^O'Sullivan, Arthur; Sheffrin, Steven M. (2003). Economics: Principles in Action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. p. 16. ISBN0-13-063085-3.CS1 maint: location (link)
- ^'CCP Exam Dumps'. Retrieved 1 March 2018.
Further reading[edit]
Wikimedia Commons has media related to Costs. |
Look up cost or time-consuming in Wiktionary, the free dictionary. |
- William Baumol (1968), Entrepreneurship in Economic Theory. American Economic Review, Papers and Proceedings.
- Stephen Ison and Stuart Wall (2007), Economics, 4th Edition, Harlow, England; New York: FT Prentice Hall.
- Israel Kirzner (1979), Perception, Opportunity and Profit, Chicago: University of Chicago Press.
Retrieved from 'https://en.wikipedia.org/w/index.php?title=Cost&oldid=1036528763'
Introduction
Definition: The nominal price of a good is its value in terms of money, such as dollars, French francs, or yen. The relative or real price is its value in terms of some other good, service, or bundle of goods. The term “relative price” is used to make comparisons of different goods at the same moment of time. The term “real price” tends to be used to make comparisons of one good to a group or bundle of other goods across different time periods, such as one year to the next.
Examples:
Nominal price: That CD costs $18. Japan’s science and technology spending costs its taxpayers about 3 trillion yen per year.
Relative price: A year of college costs about the value of a Toyota Camry. Those tickets to see Lady Gaga cost me three weeks’ worth of food.
Real price: The real price of coffee rose in the last year, so to buy a pound of coffee I now have to skip a day of croissants or buy fewer songs on iTunes. My cost of living rose 2% last year in real terms.
When we say that the relative price of computers has fallen in recent years, we mean that the price of computers relative to or measured in terms of other goods and services–such as TVs, cars, tickets to the Super Bowl, or how many hours you have to work to buy a computer–has declined. The opportunity cost has fallen.
When economists talk about prices, they always mean relative or real prices, even if they use dollars to express themselves succinctly in conversation. Most of the time, you can be pretty sure that if the nominal price of a bag of chips goes up from $1.00/bag to $1.05/bag (that is, by 5%), its relative price when compared to other goods has also increased by 5%. Economists usually give examples using nominal prices because nominal prices are familiar and easy to understand. Nominal prices are the equivalent of relative prices except in times of inflation.
Although the real price of a good or service is just another term for its relative price, the term “real price” can be a little confusing. It tends to used to make comparisons of groups or bundles of goods and services across time.
Let’s say every month you go to the store and buy the same group of things–say, 4 bottles of soda, 2 bags of chips, 1 jar of salsa, and 1 pack of paper plates. You can compare the total price of that bundle from one month to the next. Suppose for several months the bundle always costs you $10/month. Maybe one month soda costs a little more and chips a little less, while the next month the chips cost a little more and the soda a little less, but the total is always $10. That is, the relative prices of soda and chips change from month to month, but the whole bundle costs the same amount each month.
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Economists describe this common occurrence by saying there is no change in the real price of your bundle. Nothing changes on average from one month to the next.
Now suppose that suddenly one month the price of the whole bundle increases and you have to pay $11. Economists describe this by saying that the real price has risen by 10% (because [$11-$10]/$10 = 10%). They alternatively say that the bundle went up by 10% in real terms. Compared to the previous month, that same bundle of goods increased in price.
If you happen to include enough goods and services in the bundle, you could alternatively say there was a 10% inflation. Inflation means that the nominal prices of all goods and services in the economy increase on average. A 10% inflation means that the nominal cost of a bundle of everything you buy in total–including your rent, bus fare, movie tickets, food, etc.–has risen by 10%. (You could equally well describe this by saying your cost of living increased.)
Economists don’t have time to track your personal purchases, but they do track the prices of some very large bundles of goods and services and thereby create estimates of inflation. They use those estimates to adjust for inflation. If economists say that the real, or inflation-adjusted price of chips went up, they mean that the price of chips went up by more than overall inflation. That is, if the price of chips rises from $1/bag to $1.30/bag, and inflation or the average price of goods and services rose by 10%, the inflation-adjusted increase is only $.20 a bag (because the portion of the increase due to overall inflation would be 10% or $.10 more per bag).
Definitions and Basics
Real versus nominal value, at Answers.com
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In economics, the nominal values of something are its money values in different years. Real values adjust for differences in the price level in those years. Examples include a bundle of commodities, such as Gross Domestic Product, and income. For a series of nominal values in successive years, different values could be because of differences in the price level. But nominal values do not specify how much of the difference is from changes in the price level. Real values remove this ambiguity. Real values convert the nominal values as if prices were constant in each year of the series. Any differences in real values are then attributed to differences in quantities of the bundle or differences in the amount of goods that the money incomes could buy in each year….
National Income Accounts, from the Concise Encyclopedia of Economics
In practice BEA first uses the raw data on production to make estimates of nominal GDP, or GDP in current dollars. It then adjusts these data for inflation to arrive at real GDP. But BEA also uses the nominal GDP figures to produce the “income side” of GDP in double-entry bookkeeping. For every dollar of GDP there is a dollar of income. The income numbers inform us about overall trends in the income of corporations and individuals. Other agencies and private sources report bits and pieces of the income data, but the income data associated with the GDP provide a comprehensive and consistent set of income figures for the United States. These data can be used to address important and controversial issues such as the level and growth of disposable income per capita, the return on investment, and the level of saving….
Real vs. nominal interest rates: Interest Rates, by Burton G. Malkiel. Concise Encyclopedia of Economics
People’s willingness to lend money depends partly on the inflation rate. If prices are expected to be stable, I may be happy to lend money for a year at 4 percent because I expect to have 4 percent more purchasing power at the end of the year. But suppose the inflation rate is expected to be 10 percent. Then, all other things being equal, I will insist on a 14 percent rate on interest, ten percentage points of which compensate me for the inflation. Economist Irving Fisher pointed out this fact almost a century ago, distinguishing clearly between the real rate of interest (4 percent in the above example) and the nominal rate of interest (14 percent in the above example), which equals the real rate plus the expected inflation rate.
In the News and Examples
How many days of work till you have paid your taxes? Tax Freedom Day. TaxFoundation.org
Is real money online poker legal in oregon. Tax Freedom Day will arrive on April 12 this year, the 102nd day of 2011. That means Americans will work well over three months of the year, from January 1 to April 12, before they have earned enough money to pay this year’s tax obligations at the federal, state and local levels.
Interest, by Paul Heyne. Concise Encyclopedia of Economics
The real interest rate on money loans will be the stated (or nominal) rate minus the anticipated rate of inflation. In countries that are experiencing rapid growth in the amount of money available, interest rates will be very high. But these will be not be high real interest rates. Instead, they will be high nominal interest rates. If expected inflation is 10 percent, for example, and if the real interest rate is 5 percent, the nominal interest rate is 15 percent. But someone who lends money at 15 percent for a year will not be repaid with 15 percent more resources at the end of the year. Rather, the lender will be repaid with 15 percent more money and will be able to use that money to buy only 5 percent more resources. …
A Little History: Primary Sources and References
Irving Fisher, from the Concise Encyclopedia of Economics
Fisher was also the first economist to distinguish clearly between real and nominal interest rates. He pointed out that the real interest rate is equal to the nominal interest rate (the one we observe) minus the expected inflation rate. If the nominal interest rate is 12 percent, for example, but people expect inflation of 7 percent, then the real interest rate is only 5 percent. Again, this is still the basic understanding of modern economists….
Early understandings of nominal versus real/relative price changes in gold and silver markets. Chapter 5. English Currency Controversies, 1825-1865, by Jacob Viner, from Studies in the Theory of International Trade
In Hume’s account, changes in price levels thus play the predominant role in bringing about the necessary adjustment of trade balances, and are assisted only by fluctuations in exchange rates, held to be a factor of minor importance. In recent years a number of writers, most notably Ohlin, have contended that such an account leaves out of the picture an important equilibrating factor. These writers insist that much, or even all, of the equilibrating activity commonly attributed to relative price changes is really exercised by the direct effects on trade balances of the relative shift, as between the two regions, in the amounts of means of payments or in money incomes; that when disturbances in international balances occur, the restoration of equilibrium will or can take place unaccompanied by relative price changes or accompanied by only minor changes in relative prices; and that such changes if they do occur will not be, or are not likely to be, or need not necessarily be–which of these is supposed to be the fact is not always made clear–of the type postulated in the later classical doctrine as expounded by J. S. Mill or Taussig. While none of these writers seems to have applied his doctrine to a currency disturbance such as postulated by Hume, where the need for at least temporary price changes of some kind would seem most obvious, it may be assumed, nevertheless, that they would hold Hume’s analysis of the mechanism to be inadequate even when confined to such cases….
Difference Between Cost And Costs
Advanced Resources
Related Topics
Inflation
Opportunity Cost
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Opportunity Cost
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