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Economy and Finance

Economy and Finance

What is opportunity cost, fixed cost and variable cost?

01 Sep 2023 Zinkpot 341
What is opportunity cost, fixed cost and variable cost?
  1. What is an opportunity cost? The opportunity cost of producing any good is the next best alternative good that is given up to produce this good.
  2. In other words, the cost of producing a particular quantity of a commodity is measured in terms of the quantity of some other commodity that could have been obtained instead.
  3. The opportunity cost rises because of the scarcity of resources and the fact that resources have alternative uses. 
  4. For example, given resources may be used for the production of cloth as well as bread. If a given amount of resources can produce 1 metre of cloth or 20 loaves of bread, then the opportunity cost of 1 metre of cloth is 20 loaves of bread, which needs to be sacrificed in order to produce 1 metre of cloth.
  5. It is important to note that the opportunity cost of producing a good is not any other alternative good that could be produced with the same resources. Rather, it is the next best alternative good that could be produced with the same resources.
  6. The concept of opportunity cost has a wide range of applications including making production decisions, determining national priorities, studying consumer behaviour, determining relative prices, and determining factor remuneration.
  7. What is fixed cost?
  8. The fixed cost is the cost incurred on fixed factors. Fixed factors are those factors the quantity of which can neither be increased nor decreased in the short run. 
  9. Fixed factors include capital equipment, factory building, management etc. These factors do not depend upon the level of output.
  10. Fixed cost consists of salaries of the permanent staff, interest on the borrowed capital, rent of the factory building, depreciation of machinery, expenses for the maintenance of the building, property tax and license fee, etc.
  11. What is variable cost?
  12. It is the cost which is incurred on variable factors which are those factors the supply of which can be easily changed by any desired quantity in the short term.
  13. The quantities of variable factors rise and fall with a change in the level of output. Raw materials and labour are examples of variable factors.
  14. Various types of variable costs are expenditures incurred on raw materials, wages and salaries paid to casual workers, running expenses like electricity, and taxes of the type of excise duties, which depend upon the output produced.
     

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