Question

Define cost. Distinguish between fixed and variable costs. Give one example of each.

Answer 1

Cost is the total expenditure incurred in producing a commodity. In economics, it is sum of total of actual expenditure incurred on inputs (i. e. explicit cost) and the imputed valued of inputs supplied by the owners (i. e. implicit cost).

	Fixed costs	Variable costs
Definition	Incurred on hiring fixed factors of production	Incurred on hiring variable factors of production
Variability	Remain constant irrespective of the units of output produced	Vary directly as per the variation in the output, then higher variable costs are incurred and vice-versa
Example	Salary of permanent staff, output produced, etc.	Wages of casual labours, cost of raw materials, etc.