Cost is what you give up to get something. In business, it is the money spent on labor, materials, rent, and equipment. In economics, it also includes opportunity cost: the value of the next best alternative. If you spend an hour studying, the cost includes the hour you could have spent working or sleeping.

Costs come in types. Fixed costs do not change with output, like rent. Variable costs rise with production, like raw materials. Total cost is the sum. Average cost is total cost divided by quantity. Marginal cost is the cost of producing one more unit. These distinctions matter for pricing and production decisions.

Businesses track costs obsessively. A small change in material costs can wipe out a thin profit margin. Consumers feel costs too, though they often see only the price. Understanding cost helps explain why prices rise, why companies outsource, and why some goods are cheap while others are not.

Key cost concepts

• Fixed costs
• Variable costs
• Total cost
• Average cost
• Marginal cost
• Opportunity cost