"Understanding Costs: The Cornerstone of Profit Maximization"

INTRODUCTION: The firm has to play the dual role of a producer and a seller. As a producer, it attempts to minimize the cost of production and as a seller, it attempts to minimize the revenue. The ultimate goal of a producer is to maximize profit.

Cost: It refers to all sorts of monetary expenditures incurred by production of a commodity. In the other word, cost is expenditure incurred on different inputs like labour, capital, land, technology etc during production on commodities.

TYPES OF COST

• Explicit cost: It is the cost involving direct monetary payment for factors of production not owned by the firm of the entrepreneur. For eg: rent on land and building, wages to hire labour etc.
• Implicit cost: It is the cost of self-owned factor of production employed by entrepreneurs in their own firm. For eg: the entrepreneur has invested his own capital etc.
• Fixed cost: It is the cost incurred by the fixed factors of production which does not change with change in quantity of output. For eg: rent, wages of permanent employees etc.
• Variable cost: It is the cost incurred by variable factors of production which change in quantity in quantity of output. For eg: wages of casual labour, cost of raw materials etc.
• Total cost: It is the amount received by the addition of total fixed cost and total variable cost. 

Thus, 

TC=TFC+TVC 

Where,

TC=Total cost

TFC=Total fixed cost

TVC= Total variable cost

• Average cost: It is the amount obtained by the ratio of total cost  and output. 

Thus, 

AC=TC/Q

Where,

AC=Average cost

TC=Total cost

Q=output

• Marginal cost: It is the amount obtained by the ratio of change in total cost and change in putput.

Thus,

MC=change in TC/change in output