Class 11 Micro Economics Notes · CBSE

Meaning and Types of Cost

Meaning and Types of Cost — exploring explicit and implicit costs, opportunity cost, and the cost function. CBSE Class 11 Microeconomics notes with examples.

Last updated: 12 Sep 2026

Notes

Cost of Production

The expenditure incurred by a firm on the inputs required for producing goods and services is known as the cost of production.

Production costs are important in determining a firm's output. This study lays the foundation for understanding the supply decisions of business firms.

Explicit Cost and Implicit Cost

Cost

Cost is the total expenditure incurred in producing a commodity. In Economics, cost is the sum total of explicit cost and implicit cost.

Explicit Cost vs Implicit Cost
Aspect	Explicit Cost	Implicit Cost
Meaning	It is the payment made to outsiders for hiring factor services. It is the actual money expenditure on inputs.	It is the cost of self-supplied factors. It is the estimated value of the inputs supplied by the owners including normal profit.
Money Payment	It involves actual money payment on buying and hiring inputs.	It involves imputed value of factors owned by the firm. There is no money payment involved.
Example	Payment of wages, rent, insurance premium, payment for raw materials, etc.	Interest on own capital, rent of own land, imputed salary for the services of the entrepreneur, etc.

Two notes to remember: (1) Explicit Cost is in the nature of a contractual payment, while in the case of Implicit Cost there is NO contractual obligation for payment to anyone else to obtain the factor services. (2) ‘Normal Profit' is also treated as part of the Implicit Cost because it is the imputed value of entrepreneurial services provided by the owner.

How to Measure Implicit Cost

Implicit Cost

It is the estimated value of the inputs supplied by the owners including normal profit. Such costs are the costs of self-supplied factors. When an entrepreneur uses his own capital or utilises his own land or acts as a manager for his firm by himself, then the entrepreneur does not pay any interest, rent or salary for such productive services to himself, although the payments accrue to him. However, he could have earned interest, rent and salary if the services were provided to other firms.

Implicit cost is measured by determining the value of self-supplied factors in terms of their market price.

It is calculated because if such factors were not owned and used by the entrepreneur in his firm, then he would have hired them from outsiders. So the imputed value of factors is included in the total cost of production.

Example: If a doctor has opened a clinic at his home, then the imputed value of salary for his services will be included in cost. The value of salary will be calculated on the basis of the salary that he would receive if he is employed by someone else.

Economic Cost vs Accounting Cost

Economic Cost

Economic Cost = Explicit Cost + Implicit Cost

The sum of explicit cost and implicit cost is the total cost of production of a commodity.

Accounting Cost

Accounting Cost = Explicit Cost Only

Economic cost of production includes not only the accounting cost (i.e. the explicit costs) but also the implicit cost.

The sum of explicit cost and implicit cost is the total cost of production of a commodity.

Cost Function

Cost function refers to the functional relationship between cost and output. The relation between cost and output is known as the cost function.

Cost Function

C = f(q)

Where:

C = Cost of production

q = Quantity of output

f = Functional relationship

Opportunity Cost

Opportunity cost is the cost of the next best alternative foregone.

Opportunity cost is very important as it forms the basis of the concept of cost.

If a firm decides to produce a particular commodity, then it always considers the value of the alternative commodity which is not produced. The value of the alternative commodity is the opportunity cost of the good that the firm is now producing.

Suppose a farmer can produce either 50 quintals of rice or 40 quintals of wheat on his land with the given resources. Choose what the farmer grows:

Other Types of Cost

Money Cost

The total money expenditure incurred by the firm on producing a commodity — purchase of raw materials, payment of wages, interest, rent, etc.

Real Cost

The pain, sacrifice and effort involved in producing a commodity — exertion of labour, waiting by the owners of capital.

Private Cost

The cost incurred by an individual firm in producing a commodity — explicit + implicit costs of the firm.

Social Cost

The cost incurred by society as a whole due to production — private cost + external cost, e.g. pollution.

Key Takeaways

Cost of production is the expenditure on all inputs (factor and non-factor) used to produce goods and services.
Explicit cost involves actual money payment (wages, rent, raw materials); implicit cost is the imputed value of self-supplied factors and normal profit.
Economic Cost = Explicit Cost + Implicit Cost. Accounting Cost only considers explicit cost.
The cost function C = f(q) describes the relationship between cost and output.
Opportunity cost is the value of the next best alternative foregone — every choice has a cost.
Other types of cost include Money Cost, Real Cost, Private Cost, and Social Cost.