The cost of a firm refers to the different expenses incurred by a firm in its establishment and production of goods and services. Costs to a firm are therefore rewards to all those factors of production employed by the firm to produce goods and services.

Cost can be looked at in a number of different ways:

Money Cost:- It is the total money expenses incurred by a firm in producing a given commodity. This includes wages, cost of raw materials, expenses on equipment, rent etc..

Real cost;- Is a measure of disutility pain or discomfort involved for labour when engaged in production. Real cost of production of a given commodity may also be defined in terms of its opportunity cost. Thus , it is the amount of alternative commodities foregone to produce the commodity.

Private Costs versus Social Costs

Private costs are expenses incurred by an individual producer ( firm) in the course of production. Private cost has got two components namely explicit and implicit costs.

Explicit costs:- These are expenses incurred by a firm in paying for factors of production which do not belong to it.

These are the costs considered when calculating the firm's cost of production. Explicit costs are also termed as expenditure or outlay costs.

Implicit Costs:- These are costs which cannot be included in the firm's costing calculations or in computing the firms' profits. It is difficult to attach a money value to these costs i.e. basically social costs.

Social costs are the costs of producing certain commodities, experienced by the society. Social costs may occur in terms of opportunity costs e.g. producing more of one commodity means foregoing production of another commodity which society may require most or social costs would be in terms of negative externalities.

An externality is the effect of production by a firm on the society. Negative externalities are the bad effects or disadvantages of production on society such as pollution, accidents, noise, displacement of people etc.. These are also called third party effects.

Past or Sunk Vs Future costs.

Past or sunk costs are actual costs adjusted from previous records,. Future costs on the other hand are costs based on focus and useful for expenditure control and projection of the future income situation of a firm.

Cost of Production in the Short Run

The shortrun period is the time lag within which some factors of production are fixed while others are variable. The following types of costs are incurred by a firm in the shortrun.