accounting cost - actual expenses, plus depreciation
- more concerned with past performance
- depreciation expenses calculated for capital equipment
- more connected to the IRS than economic cost
economic cost - cost of utilizing all resources in production
- more forward-looking view of the firm
- concerned w/ what cost will be in the future
- associated w/ forgone opportunities, includes opportunity cost
- talks about all the costs/resources that the firm can control/change
opportunity cost - sometimes synonymous w/ economic cost
- unused opportunities treated as costs (since firms not using resources in the most efficient way)
- monetary transaction may be absent, but opportunity still there
- for example, company owns a building or space that it doesn't use. since they could've have rented it out or sold it, this is an opportunity cost
- for example, store owner doesn't pay herself, but could have or worked for money elsewhere, so this becomes an opportunity cost
- hidden, but need to be considered in economic decisions
sunk cost - shouldn't be taken into account in economic decisions
- expense that has been made and can't be recovered
- visible and recorded, but shouldn't be considered for decisions
- certain specialized equipment can't be converted to do any other tasks >> sunk cost when unused
- has opportunity cost of 0 since you can't use them for anything else
- prospective sunk cost - hasn't been made yet
- considered an investment, economical if it can generate enough profit to cover its expense
total cost - made up of fixed and variable cost
- fixed cost (FC) - cost that doesn't vary w/ output
- paid even when output is 0
- only removed when firm goes out of business
- different from sunks costs since sunk costs can't be recovered even when the firm goes out of business
- variable cost (VC) - varies w/ output, dependent on Q
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