Why Are Costs Important in Economics?

by Marisa Swanson; Updated September 26, 2017
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Costs are an integral part to the field of economics because economics studies choices. The choices we make are based on weighing our unlimited wants with limited resources to achieve the things we desire. We could not make decisions without considering costs, and the study of economics would be at a loss without regarding them highly.

Cost-benefit Analysis

In every day life for individuals, business and corporations, cost-benefit analyses are carried out. Every time you make a purchase you have done so after a cost-benefit analysis. If the cost was too high, you wouldn't have taken steps to procure it. If the benefit is high, you might pay more than you would for another object with fewer benefits. These decisions involve weighing costs against benefits.

Opportunity Cost

In economics, the opportunity cost is what you give up in order to have or do something else. Let's say you could either see a movie or go fishing. If you fish, the opportunity cost of doing so is seeing the film. If you see the movie, the opportunity cost is fishing.

Economic Profit

In business, a profit is the amount of money gained after costs are deducted. If something is sold for $20 and cost $10 to produce, the profit is $10. But, there is also economic profit. This seeks to attribute cost based on what you've given up to produce the item, not just the money you spent to make it. If you gave up making $30 per hour at another job and you spent $10 making the product (assuming you didn't get paid to produce), then your economic cost is actually $40. If you sold the product for $20, you're economic profit is actually a minus $20.

Sunk Costs

In addition to cost-benefit analysis, opportunity costs and economic profit (which takes opportunity costs into account), there are sunk costs. Let's say you pay $10 to see a movie instead of studying. You hate the movie after 10 minutes, but decide to stay through it to get your "money's worth." In economics this is a mistake. Any money you release that cannot be returned is a sunk cost. Nothing you do at that point will get your "money's worth." You should go study; the time would be better spent.

Costs in Supply and Demand

Each business needs to find the price at which its product will sell the most. If the cost is too high, the product's price might be too high and will not be bought by consumers. If the price is too small and the market becomes oversupplied, the consumers may lose value for the product. Costs must be controlled by the business to avoid problems of demand and supply in the market.

Find Out More

There are many more costs which the study of economics considers. However, the previous five are some of the most pertinent. If you would like to know more about costs in economics, visit the website Economicswebinstitute.org. Or you can check out a book from your library. "Economics In One Lesson..." by Henry Hazlitt is a great way to get started.

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